Management of free cash flow is an important part of business and financing. Free cash flow is one of the methods to calculate a business’s profitability. Business owners, whether small scale or even huge corporations benefit from accounting free cash flows. Bookkeepers and accountants calculate it on a cash basis, making it difficult to manipulate and less inclined to manipulation.
Here are some tips on how to calculate your business’s free cash flow.
- Have a hard copy of your company annual report. An annual report gives you a picture of the financial standing and company’s condition. It is used to disclose the company’s status to its shareholders. There are two ways of retrieving the annual report of your business. First, you can print a copy of the annual report from the online Electronic Data Gathering, Analysis and Retrieval (EDGAR) database of the Securities and Exchange Commission. This is the Form 10K. Second, you may get a copy from the "Investors’ Relations" in your company’s website.
- Look at the "Financial Statement" part. Browse your annual report and look for the financial statement. Note the figures at the "company operations" and "capital expenditures" section. You will need this to calculate the free cash flow.
- Company operations. You can determine the value for company operations; subtract the figures of "cash in" from "cash out".Example: cash in = $ 3,800.00 less cash out = $ 1,300.00, company operations is $ 2,500.00.
- Capital expenditures. Capital expenditure is the value the accumulated expenses from financing and the figures accumulated from all the investments. Financing is always negative, while investments are always positive.
- Company operations minus the Capital expenditures. Accounting the company’s free cash flow is quite simple. You just have to take the numbers from the company operations less your company’s capital expenditures; note the financing and investments. Example: The company’s operation report has $ 2,500.00, while the capital expenditure is – $ 4,960.00 for financing and + $ 1,300.00 for investments. The equation should be $ 2,500.00 – $ 4,960.00 + $ 1,300.00. Your free cash flow is $ 1,160.00.
- Do not fret if your free cash flow is sometimes negative. Businesses sometimes need to expand. To do so, the company will have to allocate a large sum of money, making your free cash flow negative or deficit.
- To see if your annual free cash flow is still ok, look at the free cash flow at the start of the year. Compare the figures from the current free cash flow. Example, if your free cash flow at the start of the year is $ 8, 900.00, if you deduct the current free cash flow, which is -$1,160.00, you will still have a $7,740.00 in your account.
Measure your business’ profitability using the free cash flow. If your business is in good shape, do not be afraid to invest and spend. Manage your cash flow properly and see your business grow.