Understanding Free Cash Flow for Long-Term Growth
Do you know your free cash flow? Just last week, I engaged with two successful businesses puzzled by their stunted growth, despite having a robust business model and a healthy profit & loss (P&L) statement.
Why the Stalemate? They neglected that most important rule in business, that Cash is King!
Understanding Profitability
I often talk about the importance of understanding profitability in your business. It’s essential to recognise that your Gross Profit is your “true” profit figure and to control your overheads for scalability.
However, it’s also crucial not to overlook cash flow as one of the most vital financial indicators, even when you see a paper profit.
Overlooking this key element can lead to a distorted picture of your business’s financial health.
Why is Cash Flow Important?
A better cash conversion cycle equals a better financial future. If you’re not in control of your cash flow, the inevitable outcomes are stagnant growth and eventual business failure.
This is especially pertinent now, as rising interest rates and stricter tax enforcement measures put additional pressure on businesses.
Failing to maintain adequate cash reserves can lead to serious consequences like business collapse.
The Solution: Key Reports for Cash Flow Analysis
If you find yourself wondering, “Where is my cash?” consider these steps:
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- Review your Profit and Loss report. Examine your closing profit (or loss) for the quarter, considering quarterly periods for a more balanced view and easier trend analysis.
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- Check your cash flow report or balance sheet to identify any shifts in your cash reserves.
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- Evaluate your non-wage extractions each quarter.
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- Assess the funding costs paid to external lenders for any borrowings—be it cars, business finance, credit cards, or equipment finance.
- Take stock of any investments you’ve made into fixed assets.
These factors will need to be deducted from your Profit and Loss report. A detailed understanding of net cash movement allows for an accurate cash flow profit analysis.
By following this process, you empower yourself to steer your business toward a truly profitable situation.
This refined focus on cash flow, along with maintaining a healthy profit margin, will provide you with a more complete and actionable financial picture for long-term business success.
If you find yourself not understand this process, PLEASE do yourself a favour and reach out to completely understand how your cashflow position is tracking.
Some great resources include:
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- Cashflow Calculator – A tool for you to download now!
