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Product Managers track a lot of metrics everyday. No matter how much we track these metrics, there is one key term in financial accounting that I’ve realized is important for every Product Manager to know. That’s cash flow. What is it? Why is it important for a Product Manager? That’s what I’ll quickly cover in this article.
The term Cash Flow is a self-explanatory term, and one that most of us are exposed to every day in our own personal lives. Every month or every fortnight our bank accounts are credited with a certain sum of money in the form of a salary. To be able to live a living of our choice, we spend that money into living expenses. This is cash flow. It’s the flow of cash or money in and out of a bank account or just your pocket.
As product managers, we need to understand this term well enough to be able to help the CFO or the finance team with forecasts along with assumptions. Cash flow is a term that’s used even by businesses to continuously evaluate various financial decisions. CFOs are continuously evaluating various forecasts to understand the amount of money that is needed for business operations (operational expenses or OpEx). They understand projections across product development, sales, marketing and support. This is because if there is lesser money in the bank, the CFO will need to prepare the necessary cash in order to pay the bills and keep the business running.
You may wonder why a product manager should worry about this, when its a CFO’s problem. It’s simple and let me explain why. As product managers we prepare business cases with revenue projections that takes into account the number of units and the cost at which you foresee products being sold at. These revenue projections also have projections on cost and their impact on other key metrics like gross margins and net profits.
The CFO on the other hand is responsible for the enterprise’s money management. Where to get money from if there isn’t enough cash, where to invest money in if there is excess cash, are some ways the CFO thinks.
Now imagine 8 months down the line, your sales team have been able to sell lesser number of units than expected. Or perhaps at a lesser (discounted) price than expected or a combination of the two. This will have an effect on the net profits and hence the money available in the bank for planned expenses. On the other hand, if the sales team have ended up selling more, the CFO has a problem of having to invest the excess cash in the right places.
Cash flow is one of the key constituents of a product manager’s dashboard once the product hits the market. A positive cash flow is an indication for a well performing business. That said, if you are putting together a business case and need to understand how to put together the financial projections for your product’s business, you need to know something more. You may need to understand a slightly different aspect of cash flow, referred to as the Discounted Cash Flow.
To give your understanding a shot, start maintaining a personal cash flow journal for yourself. A personal cash flow journal is a good way to manage your personal finances too. This helps you understand cash flow better and relate to your understanding of your product’s business better.
I’ve explored the topic of metrics more in this blog and the podcast. Here are a few resources you must read and listen to.
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