Practice Made Perfect 20 is the ideal opportunity to spend quality time with the best financial-advisory business consultants in the country. You get tips, tools, and worksheets to ensure that you can manage your practice to become the business success you want it to be. This book will be your new best friend—guaranteed | 168 Practice Made Perfect go back to the shareholders to ask for a loan or infusion of cash for the business. Use debt to fund the balance sheet not to cover losses on the income statement. Recognize the principle of financial leverage whereby debt is used to finance assets to help you produce a profit. In addition match funding to the useful life of an asset. Be careful about using short-term lines of credit to finance long-term needs. Recognize that equity can come from only two sources and that for both emotional and financial reasons it s prudent to retain some earnings in your business to help fund your growth. Analyzing the Statement of Cash Flow Once you understand how this statement of cash flow is constructed the analysis of cash flow becomes fairly straightforward. The most helpful cash flow ratios to observe are Operating cash flow to revenue Operating cash flow to total assets Operating cash flow to equity Operating cash flow is often referred to as free cash flow because it s the amount available to the owner before investment in fixed assets and before funding from outside sources. Free cash flow is a familiar concept in the valuation of an advisory firm because it s more relevant than applying a multiple to operating profit or revenue. To determine whether the business is actually producing a return you need to know if the business is producing positive cash flow from operations. Knowing the ratio of operating cash flow to revenue to total assets and to equity makes you better able to evaluate the real financial returns in your business. Operating cash flow to revenue. Much like the concept of operating profit margin operating profit -r revenue the OCF-to-revenue ratio tells you your cash flow return on revenue. This number should at least remain fairly constant over time preferably it will increase. Operating cash flow to total assets. The OCF-to-total assets ratio is significant because it helps you to evaluate whether you re producing cash flow as
