Forget Profit, Focus on Free Cash Flows for Your Small Business

For small business owners in India, tracking profitability is important. But an even more critical metric to monitor regularly is free cash flow.

Free cash flow indicates the actual liquid cash available to a business after accounting for regular operating and capital expenditures. It provides a realistic picture of financial health and flexibility, beyond just profits on paper.

Here’s why free cash flow should be the priority metric:

Day-to-Day Liquidity – Positive free cash flow means the business has sufficient cash to cover its operating costs, inventory purchases, salaries and other working capital needs for smooth day-to-day functions. Tracking it prevents nasty liquidity crunches.

Financial Discipline – Keeping free cash flow positive enforces prudent spending habits and capital allocation decisions aligned to long-term viability. Businesses remain lean and efficient.

Growth Potential – Adequate free cash reserves enables small businesses to fund expansion plans, invest in R&D, upgrade technology without straining finances or taking loans. It supports sustainable growth.

Withstand Shocks – Free cash cushions help businesses tackle unexpected emergencies or downturns without immediately hurting operations. It indicates financial resilience.

Reduced Risk – Investors and lenders prefer businesses with consistent free cash flows as it demonstrates financial prudence and viability for funding. It signals lower risk.

Maximize Value – For small business owners looking to eventually sell their company, strong history of free cash flow maximizes valuation and exit value realized.

So, focus on improving your business’ free cash position. Optimize working capital cycles, control expenses, delay avoidable investments if required. The effort will be well worth it for mastering long-term financial success.

What do you think are the most important aspects of a balance sheet for a small company? Let me know your thoughts in the comments and as usual please Follow and Subscribe for more thoughts from an Auditor's Desk.