Cash Flow Management Concepts: Unlevered vs. Levered Free Cash Flow

This lack of understanding is why many businesses fall victim to unpredictable cash flow. Forgotten car repairs for your delivery van, that quarterly software subscription you forgot about, or a surprise tax bill you weren't expecting –  these unaccounted or forgotten expenses make cash flow unpredictable. This is where Levered Free Cash Flow and Unlevered Free Cash Flow come in

What happens when cash flow is unpredictable?

• People miss important payments
• There’s an increased risk of penalties and late fees from missed deadlines
• It becomes difficult to assess your business's financial health accurately
• And more… 

All of this boils down to unnecessary stress and uncertainty, making it harder to focus on what you do best.

But what if you never had to feel blindsided when surprise bills hit? 

Here's why you need to know the difference between unlevered and levered free cash flow – it's the secret to making better decisions for your business. 

Let's get started!

Cash Flow Breakdown: Understanding Your Business's Money Flow

We all know that when it comes to the business world, cash is king. It pays the bills, covers expenses, and lets you react quickly to opportunities. Healthy cash flow allows you to steer your business where you want it.

But the thing is, even the most promising ventures can crumble without a strong foundation. And that foundation is built on cash flow management. Poor cash flow management may lead to:

• Thinking you have more cash than you do. This is a recipe for overspending. Maybe you splurge on unnecessary equipment or make unplanned withdrawals. Without a clear picture of upcoming expenses, these decisions can leave you scrambling to cover essential bills.

This can easily happen when your income and expenses come in and out of the same account. You see all the money in there and think you have more than you actually do.

With Thriday, you can have up to 10 business bank accounts* to budget like a pro.

Even better than that, you can automatically allocate money from your revenue account to your other accounts as soon as income comes in!

• Forgetting how loans affect your cash flow. Loans provide resources for growth, but they also come with regular repayment obligations. If you haven't factored these into your cash fow projections, you might be short on funds, leading to late payments and penalties.
• If you have loans, the snowball repayment method can be a great way to pay them off. We go into detail about it here: https://www.thriday.com.au/faq-categories/invoices

Multiple accounts can also be helpful with this method. Having separate accounts allows you to allocate a percentage of your revenue towards paying down your loans.

• Misunderstanding cash flow can lead to poor decision-making. You might take on too much debt, assuming your cash flow is healthier than it really is, potentially sinking your business. Similarly, unrealistic growth plans based on faulty assumptions can drain your resources and limit your ability to handle unexpected expenses.
• Banks and lenders are getting turned off. Lenders want to see businesses with solid financial management. A lack of understanding about your cash flow signals instability. This can make them hesitant to lend, leading to missed opportunities for finance and expansion.

Get ahead of the game with Thriday's guide to the top cash flow challenges facing small businesses.

Unlevered Free Cash Flow: How Much Cash  Does Your Business Make

Unlevered free cash flow refers to the cash your business generates from its core operations before considering interest payments and debt repayments.

Simply put, unlevered free cash flow reveals the raw earning power of your business. It showcases how much money you have left over after covering:

• Operating Expenses. The everyday costs of running your business – rent, wages, supplies, etc.
• Capital Expenditures. Big investments in things like property, equipment, or machinery that support your long-term operations.

Levered Free Cash Flow: How Much Cash Can Your Business 'Really Use?

Unlevered free cash flow gives you a glimpse of your business's ideal earning potential, but it doesn't consider the impact of debt. That's where levered free cash flow comes in. Levered free cash flow reveals the actual cash your business has available after accounting for all financial obligations, including debt.

In other words, levered free cash flow is your real spendable income after you've paid all the bills, including rent, wages, loan repayments, and interest.

Are you using a cash flow management system like Profit First? This would be your OpEx account. Learn more about that here. You’ll thank me later 

Unlevered Free Cash Flow Vs Levered Free Cash Flow: Why Both Numbers Matter

Profits on paper or a lot of money sitting in one bank account can be misleading, leading to insufficient funds when unexpected or unplanned obligations come due.

'Bill shock' is real, and anyone who's experienced it before will tell you it's unpleasant, to say the least!

This is where the Profit First method and tools like Thriday come in. The Profit First method provides a framework by allocating specific percentages of income to profit, owner's pay, tax, and operational expenses. It seperates money into specific accounts so it's much clearer how much you have to spend and how much you should have saved. 

Thriday takes this to another level, enabling you to automate the allocation of funds as soon as income is received and showing you exactly how much tax you should have set aside at any point in time.

Get to know more about Profit First here: https://www.thriday.com.au/blog-posts/profit-first-percentages 

Here's how understanding unlevered and levered free cash flow, combined with Thriday's features, helps solve the problem:

• Unlevered free cash flow reveals the total cash generated by your business before debt and taxes. Tracking this metric with Thriday lets you ensure your core operations are healthy enough to support your Profit First percentages.
• Levered free cash flow accounts for debt obligations, giving you a realistic view of cash available for those pre-allocated expense categories – including taxes! Thriday's powerful insights alert you to potential shortfalls, giving you time to adjust course.
• As your business grows, so will your operational expenses. Thriday helps you track these alongside your cash flow. Suppose your levered free cash flow isn't keeping up after accounting for those expenses and debt. In that case, it might be a sign to re-evaluate your Profit First percentages or streamline costs.

Let Thriday Automate Your Cash Flow Statement so you can Make Smarter Business Decisions

Gone are the days when business owners struggled with confusing spreadsheets to understand their cash flow. Understanding unlevered and levered free cash flow gives you insights, but a proper cash flow statement provides a crystal-clear roadmap for your business's finances. Thriday does the heavy lifting for you, transforming raw data into actionable information.

With Thriday, a revolutionary business finance management tool, you can:

• See the flow of money in and out of your business, revealing patterns and trends you might otherwise miss.
• Identify areas where you can cut costs or optimise spending based on accurate data, not guesswork.
• Get professional cash flow statements.

Thriday features a powerful cash flow forecasting tool that changes how businesses manage their finances. It goes beyond traditional statements, enabling you to track your financial position in the present and see the potential in the future.

It doesn't just spit out numbers; it helps you understand them.

Our Key Takeaway

The difference between a business that thrives and one that merely survives lies in understanding and diligently managing cash flow. Many businesses operate with a financial blindfold, reacting to surprises instead of proactively planning.  

Understanding unlevered and levered free cash flow removes that blindfold, and a cash flow management system makes it super easy to implement and manage. With tools like Thriday, you gain foresight, enabling you to anticipate challenges, make strategic choices, and build a resilient business to weather many financial storms.

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