Foundation Cash Flow (FCF) is a single dollar amount which provides a unique and effective measure of whether a company is "making money" and, if so, how much.
This straightforward simplicity can prevent business leaders from being immersed in financial "weeds" and inundated with financial TMI.
FCF is the changes in Foundation Capital which is discussed below.
This may sound elementary, but many businesses do not understand whether they are making money, breaking even, or losing money.
Additional benefits of the single dollar amount of FCF are it:
Reflects the core economic / business activities of a company;
Is the primary driver of a company’s financial health; and
Is a core component of the Trender® cash flow statement which is an effective, commonsense, alternative to the GAAP cash flow statement.
A strong understanding of cash flow enhances managements’ comprehension of their business.
A grasp of whether a company is making or losing money, and how much, is management's gateway to understanding their business's full financial profile.
_____________________________________________
Below is a definition, calculation, comments and illustration of Foundation Cash Flow.
FCF is one of the 5 Elements® of Financial Fundamentals developed by the Trender Platform.
______________________________________________________________________________
Foundation Cash Flow (Trender's evaluation of businesses "making money"):
Definition: Change in the amount of Working Capital.
Calculation:
FCF equals changes in the amount of equity plus changes in the amount of non-current liabilities minus changes in the amount of non-current assets.
This is counterintuitive as this calculation, of the changes in Working Capital, is the change in the non-current balance sheet items (or Foundation Capital).
Note (how to calculate a business's Foundation Capital and the equal amount of Working Capital):
Foundation Capital is the net of: equity plus non-current liabilities minus non-current assets.
Working Capital is the net of: current assets minus current liabilities.
The Trender Platform, which developed Foundation Capital and Foundation Cash Flow, has effectively used them with many businesses over the years.
Foundation Capital $ = Working Capital $
Therefore, the changes in Working Capital = FCF
Comments:
The drivers and trends of FCF provide valuable financial insights (not discussed here, but is an important subject by itself).
FCF reflects the core economic / business activities of a company because it is the change in the non-current sections of the balance sheet (or Foundation Capital), where a company's core economic / business activities are recorded.
It is important to track and understand changes in cash (or cash flow) for every period.
The difference between FCF and the changes in cash is the net of additions and deletions of non-cash working capital components…this is primarily comprised of the “holding tanks” of A/R, A/P and Inventories plus a working capital line of credit.
Unfortunately, a company’s vitally important cash flow is not understood by many business leaders – this is partly due to the GAAP cash flow statement’s commingling of unrelated core business activities (Foundation Capital activities) with Working Capital "holding tank" activities.
______________________________________________________________________________
Reach out for an introductory phone or video call to discuss how succinct and understandable financial fundamentals, including FCF, have helped the leaders of many privately owned businesses.
____________________________
Edward B. Patton
5701 Broadway, Suite 102
San Antonio, Texas 78209
Phone (210) 822-9977
Comments