So first things first: cash flow and time.
With these two currencies, all other things are possible.
Without them, nothing is possible.
- Tim Ferris Free cash flow (FCF) is the cash that is available for a business to distribute to investors or reinvest into the business.
The availability of this cash is the result of the business receiving profit from products and services.
After taking in profits, the business still have to pay its taxes and the cost of doing business (operating cost).
This left-over cash is called the FCF for the business.
As an entrepreneur, it is important that you focus on achieving free cash flow so that you can grow your business.
There is not one entrepreneur that wants to run out of cash.
To calculate free cash flow you must subtract the cost of doing business from your profits.
As a simple example: Company A buys a widget for $25, sells the widget for $100, and barring any operating expenses and taxes the company has a free cash flow of $75.
If there are capital expenditures (cash required for current operations), then you subtract that amount from the profits.
So if the cost of doing business was $20, the FCF is reduced to $55.
FCF is one of the most standard measurements to check the financial circumstances of a company.
A positive FCF shows that a company is able to save money even after all expenses.
Even a negative FCF can indicate that a company is making large investments, which can have potential for high returns in the long-term.
Also, FCF allows a business to increase value by introducing new products, paying stakeholders, and repaying debts.
FCF is relatively easy to understand business concept and is a great indicator for the health of a business.
For Investors, free cash flow represents that amount of capital your business can distribute among stakeholders.
Investors don't get paid with earnings -- they get paid with cash.
Profits do not equal cash flow.
The way a business is organized has a fundamental effect on its financial structure; thereby, affecting its free cash flow.
A company's finances and its operations are absolutely connected.
In order to maximize on free cash flow, your business must either increase profits or decrease cost.
Having the proper business system in place is a crucial element necessary to achieve a value chain that both produces high profits and low operating cost.
As an entrepreneur, you must begin with the end in mind.
Now in the Information Age, you can set you goal on creating an automated vehicle for generating cash without consuming time.
The Information Age allows information to get powered by technology and low-cost resources like silicon to produce wealth.
This means that the ability to create free cash flow for the entrepreneur has greatly increased.
FCF is available to any business that is willing to (1) build a system, (2) buy a system or (3) attach to a system.
The goal is to own a system and have people work that system for you.
The business system that you choose is the guide for your safe passage from the left side of the CASHFLOW Quadrant to the right side.
This journey will progress as you acquire a system to make your business operations smooth while creating high profits and low operating costs.
It is your bridge to financial freedom and a way to "Create Your Own Lane" in business success.