Cash flow is the net amount of cash and other equivalents that are being transferred into your accounts on a regular basis. You will need to know your monthly “cash flow” to understand how much money you are taking in during the average month. Then knowing the average expenditures that you have will understand how profitable your business is being (or not being). Having a cashflow is what will help provide value for shareholders who have invested in your company. Maximizing long-term cash flow will help create the best return on investments for their shareholders, both now and in the future.
Breaking Down Cash Flow
Breaking down your cash flow means that you don’t just understand how much cash is coming into your business but that you also understand the breakdown including the most basic parts of the financial reports. Understanding these elements of your cash flow is essential to your company’s long-term liquidity, flexibility, and overall financial performances.
Even profitable companies can fail if their cash flow does not have a great enough percentage of it in liquidity for the company to function. Therefore, understanding how these basics of cash flow break down determines how much of the company’s cash flow needs to be liquid in order to help the business operate and run smoothly. If profits are tied up in inventory or in other assets it will be very hard to pay off debt and other expenses if you don’t have the liquid cash in which to pay the debts off with.
Liquidity is a great thing, but it only tells so much of the story. There are also other things that must be looked at when determining the future of the business. We are talking about things like the level of debt that a company takes on or the amount they owe in their mortgage or on the properties they manage.
Free Cash Flows
For someone to really understand how profitable their business is one must look at the free cash flow “FCF”. It really is a useful way to measure a business’s finance performance. It’s an even better tool to use than a business’s net income. This is the most useful way to determine what money is left over for the company to use to return to their shareholders. This is the money that is left after all of the other business’s obligations are considered and paid off including ongoing expenses and debts. A healthy business is not overextended and is not taking on an undue amount of debt compared to the amount of money they are taking in.
Real World Examples
Businesses such as Walmart, who suffered from a negative $1.38 billion deficit in the 2nd quarter, may still be doing OK long as they are able to retain sufficient reserves to handle any short-term problems or liabilities that may come in the immediate future of the company. This is another way of saying that the company needs to have enough liquid assets to be able to cover short-term expenses and liabilities while still paying off all of their other expenses off.
For more information on how to get your company’s cash flow going in the proper direction, please feel free to contact us at Blackwater Capital Funding.