Free Cash Flow

So we talked in the last lesson about free cash flow and its relationship with the balance sheet and free cash flow is just money that you’ve got on hand to pay off the debts that you’ve got or to return money back to your investors in the form of dividends or pay your interest fees.

How do you unlock free cash flow?

So how do we go about unlocking free cash flow? Let’s take a look.

Accounts payable is looking at what we owe. So how much do I owe my suppliers? And if I’ve got generous credit terms, I might have a large AP number. If the accounts payable number begins to drop, it might mean the vendors are demanding money from us more quickly, which obviously could create a cash flow squeeze. Accounts receivables

On the other side of that coin, we’ve sold products or services to our customers and it takes time before they pay their invoices. If we’ve got a large AR number, it may indicate trouble. Our customers are not paying their bills. And if we can reduce AR, it means that we’re getting paid more quickly, which is obviously a good thing.

Efficiency gains unlock cash

Increasing the free cash flow number for your business means that you’re operating more efficiently. This is one area we’re going to explore where you can use data to create value for your business, and it’s an area where your management should care deeply about.