Free Cash Flow’s next stop is as profit.
Post-sale, cash is used to pay for all the costs of producing and selling your offering.
These include physical resources used to produce a product, and any costs to sell that product.
After considering those costs, you are left with Gross Profit.
But cash doesn’t stop there, it is then used to pay the ongoing expenses of the business – including payroll.
After considering all costs in a period, you are left with Net Profit.
So, Net Profit is Free Cash Flow now, right?
Well… no. Not yet.
But this is a good place to stop and consider some strategic questions.
- What strategic decisions led to an increase? Specific cost-cutting measures? Changes in inventory or supply? Payroll deduction? Vendor reduction?
- What strategic decisions led to a decrease? Increased returns? Legal costs? New regulation? A change in accounting methodology?
- If net or gross profit went up or down without a predetermined strategic driver, what now? Can/Do we lean in? Could we retake control of our strategy?
Now go spark that revolution.