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What Businesses Should Know About Levered Free Cash Flow

As an ecommerce business owner, it's important to have a clear understanding of your business's financials. One key metric to keep track of is your business's levered free cash flow (LFCF).


In this guide, we'll cover everything you need to know about LFCF, including how to calculate it and what it means for your business. We'll also provide some tips for improving your LFCF.


What is Levered Free Cash Flow?


Levered free cash flow (LFCF) is the cash that's available to your business after paying all of its debts. It's important to monitor your LFCF because it can give you insights into your business's financial health and help you make decisions about how to grow your business.


To calculate your LFCF, you'll need to start with your business's earned income before interest, taxes, depreciation and amortisation (EBITDA). EBITDA is your business's profit before paying all of its operating expenses and taxes.


From there, you'll subtract your business's capital expenditures (CAPEX). CAPEX includes all of the money your business spends on things like new equipment, buildings, or software.


Finally, you'll subtract your change in net working capital, business's capital expenditure, and mandatory debt payments. This will give you your LFCF.


The LFCF formula is as follows:


Levered free cash flow = earned income before interest, taxes, depreciation and amortisation - change in net working capital - capital expenditures - mandatory debt payments


What Does Levered Free Cash Flow Tell You?


The levered free cash flow formula is helpful for investors because it allows them to see how much cash a company has available to pay its shareholders, reinvest in its business, or pay down its debt.


Levered free cash flow is also a good metric to use when comparing companies within the same industry because it strips out the impact of a company's capital structure. This makes it easier to see which company is actually generating more cash flow.


Finally, levered free cash flow is a good predictor of a company's future stock price performance. Companies with high-levered free cash flow tend to outperform the market over the long term.


How to Improve Your Levered Free Cash Flow


There are a few things you can do to improve your levered free cash flow:


1. Increase revenues: The most obvious way to increase cash flow is to bring in more money. This can be done by growing your top line through increased sales or by reducing costs.


2. Reduce expenses: Another way to increase cash flow is to reduce your expenses. This can be done by cutting costs or by increasing efficiency.


3. Improve your capital structure: Another way to improve your levered free cash flow is to improve your capital structure. This can be done by reducing your debt or by increasing your equity.


4. Increase your asset turnover: Another way to improve your levered free cash flow is to increase your asset turnover. This can be done by increasing your sales or by reducing your inventory levels.


5. Improve your profit margin: Another way to improve your levered free cash flow is to improve your profit margin. This can be done by increasing your prices or by reducing your costs.


Conclusion


Ecommerce businesses need to be aware of levered free cash flow (LFCF) to make informed decisions about their business. LFCF is a measure of a company's cash flow that takes into account the company's debt. By understanding LFCF, ecommerce businesses can better assess their financial health and make sound investment decisions.


The ECommerce Accountant offers you the services of a seasoned Gold Coast accountant. Contact us today to learn more about how we help businesses from different industries!

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