Free Cash Flow Isn't Free

Let’s talk about Free Cash.

Have I got your attention?

Now, when it comes to business, that free cash is really free cash flow and as an indicator of the health of a business, it is a critical metric for any business, but especially so with small or startup businesses.  After all, with 4 out of 5 small businesses failing in the first five years, and 82% of those failures directly attributed to cash flow problems, smart owners realize that if they can control the cash, they can control their destiny.

The first step to preventing cash flow problems is understanding the difference between cash flow and free cash flow.

Cash Flow is classically defined as:

“the difference between the available cash at the beginning of an accounting period and that at the end of the period. Cash comes in from sales, loan proceeds, investments and the sale of assets and goes out to pay for operating and direct expenses, principal debt service, and the purchase of asset.”

Whereas the definition of Free Cash Flow is:

“a measure of a company’s financial performance, calculated as operating cash flow minus capital expenditures. FCF represents the cash that a company is able to generate after spending the money required to maintain or expand its asset base. FCF is important because it allows a company to pursue opportunities that enhance shareholder value.”

Too many times, cash-strapped small businesses (and especially their owners) make poor decisions in regards to their “money rules”.  They may mix business and personal accounts, they may take business monies for private reasons, or they may put personal monies into the business accounts.

… And not with any malicious intent.  In our experience, the owners in these situations are merely trying to get “all” the bills paid, but the result is that there is no clear path between where the money came from or where it went and as a result, there is no easy way to diagnose the overall financial health of the company.

The harder, but smarter, way to assess and access “free cash” out of a business is to make sure that your books are in impeccable order.  Should the company need an influx of cash from an owner, it can be easily seen and properly put in to place.  Should the owner need to take money out of the business, good bookkeeping clearly shows this transaction.

The real benefit of this is that the actual profitability of the business becomes more transparent and owners can use this information to plan a course of action that can lead to better free cash flow in the coming financial periods.  After all, if you don’t know how much you actually made, how can you tell if it was a “good” month or not?

This is the tip of the iceberg for all the metrics that a good bookkeeping company can reveal to you month after month.  Bookkeeping software could do it, but if you don’t know where to look for the metrics you should be measuring, you still aren’t going to be aware of what the numbers are telling you, even if they are right in front of you.  There simply is no replacement for a human being reviewing the overall health of a company – and as an owner and operator, you have many other things that need your immediate attention.

Ready to make some Free Cash?  Reach out to us here at BookKeepWithUs  and let’s make you some money!

 

All Rights Reserved to: BookKeepWithUs.com