Free cash flow is an indicator of a healthy business and a sign of your profitability. It’s what’s left over after all of your expenditures, like office rent, bills, kit, taxes and anything else you may need to pay for to operate.
To have free cash flow means you’re doing well, and will likely attract investors so it’s certainly worth pursuing. Not only that, you could use your excess cash to reinvest in your company – expanding, growing your team or paying dividends to shareholders.
Planning leads to success
You need a strong operational plan to adhere to, so you know how much free cash to expect. Cashflow forecasting your predicted figures is going to help you to stay on the right path, as this tool works from your actual data.
Working from fact, you can see exactly where you may have missed opportunities in the past. Because your outgoings are going to be fairly set, it becomes easy to see what’s going to be going out of your bank account each period, so you can look at ways to pull more cash into your company.
Look to be doing things like:
- Get someone focused on your payables and receivables. If either of these is neglected, you won’t have an accurate view of your figures.
- Get a forecast to project where your business could be, and should be. As mentioned, you can set up your forecast to run off your historical figures, so you can get the most accurate forecast possible.
- Use scenario planning (more on this later) to explore the outcomes of various different eventualities. By creating a base scenario, project best, worst and middle case outcomes for a plethora of issues or opportunities. This is the best way to make decisions with confidence and will help you think outside the box for answers. You always need a plan B in business, and this is the way to create it.
Other ways to increase your free cash flow are more focused towards what you’re doing day to day…
Assess your overheads
Look at your scenarios and see if making minor adjustments to your outgoings will make a difference over time. If your business relies on one-off transactions (rather than being able to rely upon monthly recurring revenue) then money will be a near-constant worry, so this is going to be the easiest way to save.
Assess your profitability per product or service
If your pricing is off, you’ll feel the pinch. Can you up your prices? Check out what competitors are charging for similar goods, and using benchmarking will show you industry averages to give you an idea of where you stand against the average.
Have you got a safety buffer?
In creating this initial forecast, you’ll have a prediction of revenue for the next year. You can drill into this data to see exactly what each and every decision you make will mean for your business. When you can see a graph displaying your actual results and compare it to where you’d like to be, you’ll see how you can be operating smarter.
From here, you can use scenario planning. Each and every one of your scenarios can be compared, so you know that you’re making the best call with each decision. After creating your base scenario, you can then explore variations by linking together multiple scenarios and explore the ‘what if’ options. Get the answers you need, all based on hard data.