What’s left? (Free Cash Flow)

After you’ve paid to keep the lights on in your business and then bought that bit of plant or that software upgrade that means you can keep up with the Joneses, do you know how much cash you’ve got left over to invest or grow further?

Another key working capital KPI centres on Free Cash Flow (FCF). The last in my short series on working capital KPIs, once you’ve worked out if your cash position is strong or how you might want to make it stronger, you might want to look at self financing some investment - or at least proving your ability to repay financing should you go out to market.

FCF is broadly cash generated by what you do for your customers after you’ve paid to keep the business operating or to invest in the things that can generate you more cash (capital expenditure, or capex). It’s often reviewed by investors and funders to see how reliant a business might be on external funding sources to grow further, and their ability to repay financing in the future.

Knowing your FCF position, and the trend that it follows over time, and what your projections show it could be, puts you in the driving seat for how you choose to use that money. If growth is on your radar, then your FCF is integral to knowing your working capital and liquidity strength.

Over the last few weeks I've covered current ratio, debtor days, creditor days and now free cash flow. Together these give you a working capital dashboard that helps you control your business’s direction of travel.