Edicts are coming down every day from corporate boardrooms across the country—create shareholder value. Senior executives and their direct reports are being tasked with the responsibility of making that happen. Frequently, however, the one question on their minds is, How do we make this happen? These executives have gone down many paths in an attempt to create this elusive shareholder value. These paths have included adopting strategies such as growing net income, focusing on cash flow from operations, enhancing EBITDA, and maximizing the return on investment. In many cases, these strategies have led to complete failure. When you don’t really know where you’re going, all roads will get you there.
If you are one of those people seeking to create value for your company, it is essential that you follow the right road map. That road map should include a business performance metric called free cash flow. Free cash flow methods are advantageous compared to traditional methods for evaluating business performance because they emphasize all flows and all investments occurring within a company. In that sense, free cash flow can be considered a holistic metric that views business performance from every angle.
By using free cash flow you can determine how much money can be returned to the investors as compensation for the funds they have invested in the business. Free cash flow will also help you determine what kind of return on investment your company is earning on those invested funds and whether the return is sufficient for the risk that has been taken. You can also use free cash flow adjustments to achieve more accurate net operating profit, capital investment, and return on investment calculations.
The Accenture Academy course Using Free Cash Flow to Assess Business Performance
will help you identify the importance of free cash flow as a business performance metric. Armed with this free cash flow metric, you will have the necessary road map to help you decide whether your existing business is creating value, and whether your company’s future investment plans will add or subtract from that value creation. Ultimately, by following the free cash flow road map, you will enhance your ability to traverse that winding path as you seek the intersection of cash flow and value.