Profit is defined as the difference between the total revenues obtained from your sales and the costs associated with the product or service. The benefit is, therefore, what the company will earn once it has sold its products or services, discounting their direct and indirect costs.
The magnitude benefits is the metric that par excellence is used to measure the goodness in the evolution of a business or company. For its determination, a series of generally accepted accounting standards and procedures are used. The modifications in the regulations in this respect will influence the result, being able to differ from the reality according to the criteria and regulations applied.
The box is the equivalent of oxygen in a spaceship. If there is no oxygen in a spaceship, its crew cannot survive. If there is no cash in a company, there is no way to pay salaries or their suppliers and there is possibly no way to pay the debts. Therefore, the activity is contracted, and the company can be doomed to disappear. On the contrary, when a company has liquidity in its bank accounts (cash) we are facing a symptom that the evolution of this is positive, although you do not have to stay with a fixed picture but evaluate the situation of the treasury over time to verify that this box is really generated and this is sustainable.
How to get cash?
You can get cash or money through four ways:
- The most logical. For the benefits obtained from their farms that have been transformed into available money.
- For divestments or sale of assets.
- For obtaining loans (indebtedness).
- For the contribution of capital by shareholders or partners and subsidies to the operation or investment.
The desirable thing would be to obtain cash from the activity of the company, that is, its exploitation and that this box is distributable to its shareholders, which we know by Free Cash Flow.
What is Free Cash Flow and how to calculate it?
Cash flow is the flow of money in and out over a period. To the extent that the tickets exceed the exits will accumulate money available. There are different meanings of the concept “cash flow”, namely:
- a) The flow of money for shareholders called, among other meanings, Equity Free Cash Flow (EFCF) that indicates the money generated and available to remunerate shareholders.
- b) The flow of money for capital, denominated, among other meanings, Capital Free Cash Flow (CFCF) that indicates the money generated and available to remunerate capital or permanent resources that includes shareholders and lenders (long-term financial creditors) term). This concept is the same as the concept of Free Cash Flow (FCF), that is, flow of money generated and available to remunerate your Permanent Resources. We will focus on the latter.
The Free Cash Flow is the cash flow obtained from the operating activities of the company once the investments have been deducted to maintain the business. That is, it is the money generated by the business, after deduction of the operating costs incurred and that can be used to remunerate the shareholders, the financial creditors and meet the investments in cash or miscellaneous fixed assets. necessary for the business.
Therefore, the FCF considers the cash flows generated by the assets regardless of how they are financed.
The Free Cash Flow (FCF) is an important quantity because it allows us to measure whether the investments necessary to maintain the business or the interest and dividends paid are very high or not in relation to the cash flow generated by the business activity.