We have two key reporting tools that we use:
- Wave, a cloud-based accounting system that we use to keep track of sales and related costs, and view our P/L on an accrual and basis and run various reports.
- A Google Sheet called “Free Cash Flow Financial Projections” where we track FCF (Free Cash Flow) by doing cash basis accounting.
In Wave, we do our accounting on an accrual basis. Under the accrual basis of accounting, expenses are matched with the related revenues and/or are reported when the expense occurs, not when the cash is paid. The result of accrual accounting is an income statement that better measures the profitability of Mäd during a specific time period.
This is fully updated every two weeks.
Free Cash Flow (FCF) is one way to measure a company’s financial performance.
It is calculated by taking Operating Cash Flow (Income – All Costs) and removing Capital Expenditures as they happen (not with depreciation).
FCF represents the cash that Mäd is able to generate after spending the money required to maintain or expand our assets. The interesting thing about FCF is that it actually grow even if we have months/quarters that show a negative P/L, as it measures the overall effectiveness of our business model vs our sales cycle.
A high FCF is important because it allows Mäd to pursue opportunities that enhance shareholder value. This means aggressively and proactively reinvesting future known profits back into the company to bolster future growth. For Mäd, this will especially mean a large investment in branding, employee training and development, and the highest quality equipment possible.
However, because we cannot grow Mäd with profit, but we need actual cold hard cash (who doesn’t!), we then use Google Sheets to track the amount of cash that we actually generate from our operations during a given time frame. Unlike in accrual accounting, on this sheet, we also track capital expenditure to ensure that we understand the implications of making large hardware orders as we scale.
Our calculation for FCF is the following:
(Invoices Paid + Other Income) – (Cost of Goods Sold + Operating Costs + Capital Expenditure) = Net Free Cash Flow
For tracking sales, we have one line for each customer, and the total cash received by the customer that month is entered as a sale. If there are multiple invoices, add the total of the invoices as the amount, and add a comment to the cell, giving a breakdown of the invoice details.
The final results will be the tracking of the following:
- Monthly Income
- Total Historical Income
- Monthly Expenses
- Total Historical Expenses
- Net Monthly Free Cash Flow
- Total Historical Free Cash Flow
- Free Cash Flow Margin
This is updated in real time as soon as new information (sales, costs) come in. There is a level of approximation for variable costs such as servers, where we don’t know the precise amount upfront, these can be estimated.
This is done by cloning report #2 (Free Cash Flow Report) and adding the projected payment date for potential sales, and the requirements for hiring, hardware purchased, and any additional project costs.
Updated every two weeks.