Having cash available when you need it is crucial but you also have to know how and when the cash flows in and out of your business. You just don’t “know” these things. There are skills involved to measure, monitor, and manage cash.
Develop a realistic revenue model that you can support through your operations and sales plan. If you have to build a manufacturing facility or even outsource manufacturing, it may take some time before your products are ready for sale. If you are selling into someone else’s manufactured product, understand how they buy. You may have to wait an entire cycle before you are able to sell them one product – that could be 18 months.
The FCF can be used for several purposes, including paying a dividend, buying back stock, lowering debt, or saving for future acquisitions. Without FCF, a company will find it hard to grow its business without issuing new debt or diluting the stock. Except for start up corporations that will often show negative cash flow in their beginning years, free cash flow is a good indicator of a company’s ability to both maintain and increase its operations.
When all was said and done I went to a local bank and presented it to the loan officer. She said that she normally did a quick glance and rarely read entire plans, but was so captivated by the opening Executive Summary that she asked me to wait while she finished reading. She immediately agreed to forward it to the sba representative for approval. That was an exciting moment indeed!
A cash flow examples, on the other hand, shows the movement of money in and out of your business over time. Consider this as a trend report. A balance sheet is the one other tool that measures cash but again, only at a particular moment in time. It is just like a snapshot while a cash flow analysis is like a movie.
There are many ways to dissect and collect the data. Hopefully, you have made this a part of your regular monthly data collection and analysis process. If you haven’t done it yet, you need to start.
The financial statements were just as easy to tackle. The first thing to do was the assumptions. To do that I simply took the selling price of my service (or product) and determined how much I would make in sales per day, week, month and year. That basic information was the basis for the remaining financial reports.
The annual report is the best source for this kind of information. Be sure to read the shareholders letter, as well as the presentations of the company’s product lines. Those are also part of the company’s SEC filings.