Free Cash Flow: A Simple Indicator Of A Company’s Health

Establish a relationship with a bank that offers small business loans. Open a company checking account, after a few months see if the bank will offer overdraft protection.

Your expenses could not support any business, much less a high growth business. Have a good understanding of what your expenses will be. Recognize that if you hire people, you don’t just have to pay salaries, but taxes, health insurance and other benefits, workman’s comp, and each of these people will need some square footage, a desk, a chair, a computer, a telephone, an internet hook up, etc. You will need to hire lawyers, accountants, and possibly other professionals. You will need to market your product in some way.

This used to be more common: a business would do monthly payroll, and do a payroll advance mid-month. If your company does this, the advance does not show up on the profit and loss statement (again, on the balance sheet as a prepaid asset). So, be careful about when you are looking at statements. The profit will be high (and cash low) after the advance, but will correct itself when payroll is run.

Dow Chemical Co. (DOW). As one of the largest owner of chemical plants, Dow would take a long time to depreciate its long term assets, right? Wrong. For fiscal year 2005, Dow incurred a depreciation cost of $ 2.08 Billion. Meanwhile, its total depreciable long term assets are at $ 17.1 Billion. This gives it a ‘mere’ 8.2 years to depreciate all its assets. Dow assumes that the plant lifetime is around 8.2 years. This implies that even if Dow plant is still running ten years from now, it has already been expensed for and Dow can regard the plant cost as ‘free’.

A business owner must know how much cash flow is available on a daily basis. If you don’t know this you are heading for disaster. Because even if it seems to be a lot of cash coming in, you may very well have a lot of expenses that have crept in over the last few months. Every real business owner knows how much cash he has at all times. The business owner should look at his or her cash flow examples, Balance statement and Profit and Loss Statement weekly in most cases. Most business owners never do and then panic when things “all of a sudden” go haywire with the business.

ACCOUNTS PAYABLE: Also called A/P. These are bills that your business owes to the government or your suppliers. If you have ‘bought’ it, but haven’t paid for it yet (like when you buy ‘on account’) you create an account payable. These are found in the liability section of the balance Sheet.

Today, most student loans have low interest rates thanks to tax payer subsidies. Students who are graduating with other debt on top of student loan debt should always compare interest rates and pay off the debt with the highest rate of interest FIRST. It makes less than no sense to pay off a loan with a 4% interest rate while a line of credit sits and accumulates interest at 19% a year. Pay attention to interest rates, and you will save yourself a lot of money.