"Blog Star"

Most new folks in business and even some established business people run their businesses using gut feelings on a day to day basis. They look at their sales and they look at their deposits, and if all is well such as a positive amount of cash in the bank, then all is good!

Then on to the next item, such as maybe calling a customer, checking or pricing inventory and getting absorbed in the running of the day to day business. More often than not something will distract the process, and the next step will be to attend to the distraction. Before you know it the day is over and you prepare to close. You say to yourself, I will catch up on the books when I get home, or maybe tomorrow or the weekend, if I am feeling too tired.

Of course, when you get home there are important things to attend, dinner to prepare and kids to feed, homework to supervise and when all is done, it is time for bed because you are exhausted. Ok, so tomorrow is another day!

Why I bring this up is because it is a really a common occurrence in the day of the life of a business person. What actually happens is that proactive planning is replaced by reactive responses, as and when things occur.

So what has all this to do with Cash Flow?

Cash Flow, or more importantly Free Cash Flow is the result of proper planning and taking the correct steps to ensure that your business decisions lead to the correct results. Free Cash Flow means having cash available to pay back investors or grow the business further. Unlike earnings or net income, free cash flow is a measure of profitability that excludes the non-cash expenses of the income statement but includes spending on equipment and assets as well as changes in working capital from the balance sheet.

Because FCF accounts for changes in working capital, it can provide important insights into the value of your company and the health of its fundamental trends. For example, a decrease in accounts payable (outflow) could mean that vendors are requiring faster payment. A decrease in accounts receivable (inflow) could mean the company is collecting cash from its customers quicker. An increase in inventory (outflow) could indicate a building stockpile of unsold products. Including working capital in a measure of profitability provides an insight that is missing from the income statement.

So what this all means is that the owner has to pay attention, not just to the bank deposits or the daily payouts for expenses but also to the composition of the balance sheet as well as the gross margins on sales and any payments due for long term debts etc.

You may say that it is more important to take care of your customer because without your customer there is no business. I agree 100%. However, without proper management of the finances and understanding of the implications of your various decisions, there very well may be a short lived business rather than a growing profitable concern that increases in value over the long term. 

 The best 'bang for your buck' is to have an advisor help you or a professional manage the financial aspects and keep proper records for you, so you can get on with the running of the business.  Call me if you would like to chat!