Why Cash is King

If you're from a finance background or have spent time with entrepreneurs, especially those in Indian business families ("Baniya" mindset, as we casually call it), you know this: they care more about cash than profit. And honestly, they’re not wrong. As finance professionals, once you spend time digging deep into company financials, you start realizing that the income statement lies a lot more than the cash flow statement ever can.

Let me explain.

The income statement is built on accruals, assumptions, and estimates. Revenue is recorded when earned, not necessarily when cash is received. Expenses can be deferred. Profits can be engineered. But cash? Either it's in the bank, or it isn't. And that's why cash flow analysis is like truth serum for financial reporting.

Why Cash Tells the Real Story

Take Satyam Computers, one of India’s biggest corporate frauds. The company was showing healthy profits for years. It claimed to have thousands of crores in bank balances. But the actual cash? Barely a few crores. If someone had just matched the reported net profit with the cash flow from operations, they would have noticed the huge gap. Profits were flowing, but cash wasn't. As professionals working in equity research and valuation, we often start our analysis with the income statement. But very quickly, we learn that the numbers there don’t mean much unless they are backed by solid cash flows. We’ve seen companies where EBITDA looks impressive, but cash flows are negative. That’s when the alarm bells ring.

Why The Baniya Mindset Makes Sense

There’s a reason why your neighborhood businessman doesn't care about your accounting jargons. He wants to know only one thing: Paise aaye ya nahi? (Did the money come or not?). He might not prepare GAAPcompliant financials, but he knows how much cash came in and how much went out. That instinct is gold. Because cash doesn’t lie. When we look at businesses like DMart, the one thing that stands out is its ability to generate cash. It pays suppliers late, collects from customers early, and keeps inventory lean. The result? A negative working capital model that generates strong operating cash flow. While others celebrate profits, DMart celebrates liquidity.

Real Stories from Our Analysis Desk

We've come across companies where operating cash flow is consistently lower than net income. One retail company (let's not name names) kept showing rising profits, but its working capital kept ballooning. Receivables were piling up. Inventory was growing faster than sales. Cash was disappearing. The stock eventually crashed. Another case we dealt with: a mid-cap pharma company that was aggressively capitalizing R&D expenses and inflating profits. But once we reviewed the cash flow from investing activities, we found that actual R&D cash outflows were rising. Free cash flow turned out to be negative for three years straight. The market didn’t catch on immediately, but when debt started piling up, reality hit.

The Interlink : Balance Sheet, P&L and Cash Flow

Now here's the trick: to truly understand cash flow, you need to connect it with the other two statements. For instance, if net income is rising, but receivables are also rising faster, that increase is not cash. It’s just booked sales, not collected money. If inventory is going up, maybe the company is producing more than it can sell. In the case of Jet Airways, things looked fine on paper for years. But once you read the cash flow statement and saw the ballooning lease liabilities and poor operating cash, you knew things were not sustainable. They weren't earning enough cash to cover their obligations. Same with Yes Bank – profits were there, yes. But operating cash? Weak. Deposits were growing, but so were bad loans. That’s where cash flow from financing and operating activities need to be read side by side. Why Cash is King?

Professional Struggles : What We Deal With

Sometimes, as analysts, we deal with companies that have great stories. The narrative is exciting. Growth is projected at 25% CAGR. EBITDA margins are expanding. But when we flip to the cash flow, we see negative free cash flow, rising debt, and big capital expenditures that don’t seem to justify the future returns. You sit in investment committee meetings and say, “But guys, the cash flow doesn’t add up.” And you hear back, “But the management seems confident.” In such cases, we’ve learned to say: "Confidence is not cash."

The Metrics That Matter

Whenever we analyze any company now, we start with:

• Cash Flow from Operations (CFO) – is it positive and growing?

• CFO vs Net Profit – are they aligned, or is one outpacing the other?

• Free Cash Flow (FCF) – after capex, is there cash left?

• Cash Conversion Cycle – how efficiently is the company turning working capital into cash ?

And if we see that CFO is lower than Net Income for more than 2-3 years? Big red flag. It could mean earnings are being inflated through accruals, not cash. Then there are situations where receivables are growing faster than sales – that could indicate channel stuffing or customers delaying payments. If inventory is increasing disproportionately, it could signal overproduction or weak demand. If free cash flow is negative even during supposed good times, it raises concerns about sustainability. If cash flow from financing activities is consistently positive while CFO is negative, the company might be funding operations via debt or equity – a dangerous loop. Or when capital expenditures are rising without corresponding growth in revenue, it may point to inefficient capital allocation or vanity projects. Every mismatch between the three financial statements is a situation waiting to be investigated. And over time, we've learned that each one of these mismatches has a story behind it.

Closing Thoughts : Cash Is King

Whether you're analyzing a unicorn startup or an old-school manufacturing firm, the principle remains: cash is king. You can fake profit. You can even manipulate EPS. But faking cash? That’s hard. So the next time you're looking at a company, forget the glamorous earnings presentation. Open the cash flow statement. See where the money is really going. And ask the most baniya question of all

Bhai, paisa aa raha hai ya sirf dikha rahe ho ?