Free cash flow - what it means and how to build it.

Money comes and goes in a business. Equaling income and expenses, this is free cash flow. Keeping track of your cash flow and making sure you do not run out is the way to build it.

Your company will need to be able to have enough money coming in to cover the expenses going and then have a little money at the end of the month left over to build an increase in the cash flow.

To keep your business ahead and increase your cash flow there are some simple ideas to keep you in line to building your cash flow. Mainly people tend to forget about tracking of their finances. Planning is imperative with a business. You can do this by building a simple tracking plan three months to a year in advance.

Here is an example of a three-month tracking plan. It can be created on any spreadsheet tool.

2007
Income Jan Feb Mar
Income Source 01 $500 $500 $0
Income Source 02 $0 $0 $0
Income Source 03 $1,200 $1,200 $0
Total Revenue $1,700 $1,700 $0
Expenses
Salary $1,000 $1,000 $1,000
Salary Tax $350 $350 $350
Corporation Tax $255 $255 $0
Insurance $200 $200 $200
Retirement $0 $400 $400
Office $150 $150 $150
Phone $55 $55 $55
Broadband $50 $50 $50
Travel $100 $100 $100
Subscriptions $0 $0 $35
Accounting $100 $100 $100
Total Expenses $2,260 $2,660 $2,440
Net Income -$560 -$960 -$2,440
Opening cash $8,301 $7,377 $6,053
Closing Cash $7,741 $6,417 $3,613

What is so great about keeping this information where you can see it is that you will know what you need to have coming in to cover the cost of running your business. You will be able to see if your company is going into the red.

Many investors concentrate on a company's earnings. It is notable to comprehend that earnings and cash are not the same thing. Earnings are figures generated according to the rules of accounting, unlike cash; you cannot eat earnings.

Keep in mind that free cash flow is not the only way, and often not even the best way to evaluate and value a business. A company might pick out a strategy that results in declining or negative cash flows in the short run, but create immense shareholder value in the end. However, understanding and being able to calculate free cash flow is a critical tool that every investor should possess.

Here are a few tips on staying above water long enough to start to increase your free cash flow:

• Keep an eye on all the money owed to you. If an invoice comes due, keep track of it and make sure you are paid.
• Be realistic about expenses. Plan more for an expense.
• Update your cash flow chart regularly.
• Spend as little as possible.
• Cut expenses. That new office equipment can wait.
• Be prepared for customer to pay late. Give yourself leeway for the late payer.

Your business can increase cash reserves in a number of ways.

1. Collection of receivables
2. Tightening credit requirements
3. Taking out short term loans
4. Increasing your sales.
5. Managing your payables
6. Investing extra cash

Cash comes from sales, collections of account receivables, and the sale of assets. Appropriately managing this cash flow in a conservative manner will increase the over all free cash flow.