Free cash flow is a business's thermometer. It measures the financial performance of a business. Specifically, it reveals the cash that a business can make after taking away the purchase of assets, such as equipment and property. It reveals what investors care about most - cash. There are different types of free cash flow. Two of them are unlevered and levered. Unlevered cash flow is the amount of money a business has before paying its obligations. Levered cash flow is the cash a company has after paying its financial obligations.
So, why is free cash flow so important? Well, there are several reasons why. All around, knowing free cash flow allows a company to make sound business decisions. Knowing free cash flow gives companies an insight into the company's financial health. It allows them to know whether or not they can pay expenses, distribute money to investors and invest in stock buybacks.
When businesses are growing, it is common to have a negative free cash flow. This is usually an indicator that it is time to restructure. Restructuring can take a company from negative free cash flow to positive free cash flow. Having a positive free cash flow is a good thing for expansion. It allows the company to buy another business, invest and hire more employees. Having a positive free cash flow is an indicator of positive future earnings. Investors will take a close look at positive free cash flow before investing.
In comparison to earnings, free cash flow is much more transparent. It reveals the business's potential. With both the low valued share price and positive free cash flow, investors can usually make a good investment to produce cash and profits.
Free cash flow is calculated by subtracting the capital expenditures from the operating cash flow. This is a very common formula used for levered free cash flow. The data needed is taken from the cash flow statement. There are other formulas to calculate free cash flow, but this is the one that is most often used to calculate free cash flow.
The best way to do your free cash flow is to manage and track everything as you go along. If you are detail-oriented, you can do it on your own. Another option is to use software. There is specific software designed for this task. The process is completely automated for you and makes it very easy for you to do. Another option to determine your free cash flow is to hire a financial expert, such as an accounting specialist. An accounting specialist will jump into the spreadsheets for you and doing an accurate calculation. And in addition to doing this, a financial expert can show you new insights that you would not have thought of yourself. With the help of an expert, you will be able to make better decisions as the CEO of your company.
Whether you decide to do a free cash flow analysis on your own, use software or hire a financial expert, the bottom line is you need to do this. If you don't do a free cash flow now analysis, you won't know the financial health of your company. You won't know when to expand or when to restructure. In addition, you will not be in a good position to make good business decisions for your business.