How much money did your company save this quarter? Yes, save, like the way you save money out of your paycheck for emergencies, major purchases, or whatever. No financial-ese, companies save just like people do.
Don’t know? Well here’s how to find out!
First, pull up your company’s balance sheet, one of the 3 key financial statements. This will be available on your company’s investor relations page and most likely other web portals like Yahoo! Finance and Google Finance. The balance sheet can be a little bit confusing. Its purpose is to show that a company’s assets equal their liabilities plus shareholder equity. Assets and liabilities are pretty common-sense terms. Assets are things we own, including cash, money owed to us but not paid yet, inventory, land, equipment, etc. Liabilities are debts, accounts payable, stuff like that. Shareholder equity is a bit more confusing, and has to do with equity financing, stock issuance, and retained earnings (which is totally distinct from profits and cash). Luckily, all we need is the cash balance at the end of the previous quarter, which is usually displayed right at the top:
Then, to see how much we “saved” in the last quarter, take the same line from the following quarterly report:
It doesn’t take calculus to show how much this company saved: the balance at the end of Q3 minus the balance at the end of Q2. $452.8M – $381.6M = $71.2M.
That’s… quite a lot to add to savings in a single quarter. A 20% increase in their corporate vault in a single quarter is quite a good prompt for asking what the plan is for future cash generation, as their analysts did (several times) on the earnings call. But there’s one more thing that’s an even better prompt. How did they utilize same-quarter cash flow?
Free cash flow for the quarter was $75M (shown above). Out of that, $71.2M was socked away, or 95% of same quarter free cash flow. And those numbers are after spending $44M on property, plant, and equipment — regular growth and maintenance kind of stuff. Wow.
By now, previous mini-lessons should have etched the importance of cash and cash flow in your brain, burned it into your retinas, and tattooed it on your knuckles. Today’s lesson is on what you can do with cash when your business is successfully generating it on a consistent basis.
In general, there are only a few options:
- You could invest back in the business by advertising, buying new equipment, expanding product lines, or upgrading facilities.
- You could improve the company’s finances by building up savings or paying off debt.
- You could give back to stakeholders, including employees, shareholders, and local communities.
Option 1 will almost certainly be present in some quantity since it’s part of the regular operational side of the business. As discussed in Where Does the Cash Go?, the cash flow generated by the regular business operations is the fuel for sustainable growth. Whether we’re a giant player saving up to buy a small fry with excellent growth potential, or a mid-size company looking to expand current operations, it’s virtually a guarantee that some of the free cash flow will find its way into improving and expanding current operations.
While reinvestment in the business is virtually a given, the second and third options – improving company finances and various types of distribution back to stakeholders – are illustrative of a company’s financial philosophy and existential mission.
If that sounds a little heavy, well, just trust me, it’s really not. A corporate financial philosophy – an apparent labyrinth of polysyllabic jargon – could come down to something as simple as how much debt your company wants to keep as a percentage of its cash reserves. There are pros and cons of carrying debt as well as being debt free, but the point isn’t to discuss that, it’s to say that your company will employ cash in a way that highlights what they value.
For example, until late 2014, Apple was a debt free company. It wasn’t that they couldn’t get attractive financing or have solid growth opportunities for the money, in fact, they had one of the strongest balance sheets in the history of capitalism and unprecedented returns on capital to prove their investments. They valued being debt free, most likely, because in 1996 the company was on the verge of collapse, and having no debt and huge cash stores is a safety net between the company and that situation ever happening again.
As for giving back or “distributing” the money, that could be paying out bonuses to employees, contributing to charitable causes, or paying dividends to shareholders. Some companies are built with a community or charity-centered vision. Think of TOMS shoes, which was founded on the idea of “one for one,” giving a pair of shoes to a child in need for every pair they sell.
In the end, we have to ask ourselves what the business exists to do. We could pontificate about altruism and the greater good, but all of it is moot if the company doesn’t make money. It exists to create wealth for the people who are invested in it. Invested, in this context, could mean owning shares of the company, but it could also be working there, raising a family in a community where the company is a major presence, or a dozen other non-financial things. But what enables all of those stakeholders to get more out of the company than they put in is the ability of the company to make money.
Profit is just perception, and revenue is irrelevant. What enables a company to grow, to be agile, and to give back to its people is cash. Thinking back on the Enron travesty, they created a lot of faux-wealth by cooking the books on revenue and profit, but the house of cards came tumbling down because the cash wasn’t there. Dividends to shareholders, bonuses to employees, and debt payoff to creditors all signal a company’s strength and determination to not just posture themselves as a wise investment, but to actively and regularly show that they’re worth it.
So in the future, keep an eye on which of these 3 things a company is doing with its cash. It’s the best way to tell not only how healthy the company is, but what its priorities are.