Finance.

The framework

1. 01

   Start at operating cash, not at profit with adjustments bolted on.

   Take cash generated from operations straight off the cash flow statement, because that statement has already done the working capital arithmetic for you. Then subtract capital expenditure. If you want the number that actually drives planning, split that capex first: maintenance capex is what you must spend to stay exactly as good as you are, replacing vehicles, refreshing hardware, renewing the tooling; growth capex is what you chose to spend to become bigger. Operating cash minus maintenance capex is what the business throws off standing still. Everything below that line was a decision, and decisions can be unmade.

2. 02

   Every business overstates its growth capex.

   A cost reclassified as an investment improves the number you report to yourself, which is why the split only ever drifts in one direction. The test isn't what the asset does but what happens if you skip it: if skipping it means the business is measurably worse within two years, it's maintenance, whatever the invoice says. The software rewrite, the fleet replacement, the machine that keeps the line running are mostly maintenance. New territory, new capacity, a second site are growth. Do the split once a year with a sentence of reasoning beside each line, and keep last year's sheet, because the classification drifts towards whichever answer you wanted.

3. 03

   Name the surplus before it names itself.

   Jensen's warning concerns the money left after everything worth funding has been funded, and the failure is never dramatic. It leaves as a slightly larger office, a hire you wouldn't make twice, a second product line entered because the cash happened to be there, an acquisition explained afterwards. The defence is a standing rule written while the account is still empty: this much stays as reserve, untouchable, and anything above that floor must clear a stated return before it moves. Set the floor in months of costs, name the return the rest has to clear, and put a date on the next review.

4. 04

   A run of years, and the buyer who will read it.

   One year of free cash flow tells you very little, because a single deferred replacement or one heavy year of capital spend swings it wildly in either direction. Put three to five years side by side and the pattern shows: is the business converting profit into cash consistently, or is it profitable in the accounts and hungry in the bank? This is also the number buyers and lenders work from, since a business is priced on the cash it can hand its owner rather than the profit it can report. The run of years you assemble for yourself is the same evidence you'll one day be valued on.