Let’s recap why Free Cash Flow is so important to strategy.
What have we covered to date?
The measure of an effective strategy should be Free Cash Flow.
Budgets should address each of the areas impacting Free Cash Flow, including:
- Income Statement
- Non-Cash Net Working Capital (Accounts Receivable, Inventory, and Accounts Payable)
- Capital Expenditures
As a formula, Free Cash Flow = Cash Profit – Increase in Non-Cash Net Working Capital – Capital Expenditures
At this point, you may be thinking that the Cash Account could measure several of the same things.
True, however, cash can also be impacted by financing. Financial planning, while a critical part of the business, is not strategic planning.
Finance addresses where cash comes from. Strategy addresses where cash should be invested and how it is returned.
In an earlier post, we suggested preparing a financing budget as well. Finance and strategy go hand-in-hand.
However, strategy shouldn’t be measured through a new loan, quicker payback of debt, or equity sale or buyback.
These are all critical functions that allow strategy to happen, as are HR, legal, operations, etc. But are not strategy directly.
So, now we have a full picture of Free Cash Flow…
Now go spark that revolution.