Cash & working capital
Free cash flow (FCF)
Free cash flow is the cash a business generates from operations after paying for the equipment and other long-term assets it needs to keep running.
Free cash flow = Operating cash flow − Capital expenditures
Worked example
| Operating cash flow for the year | $400,000 |
| Capital expenditures for the year | $150,000 |
$400,000 − $150,000 = $250,000
Why it matters
Free cash flow is what is actually available to repay debt, pay owners or fund growth. A business can report a profit and still have negative free cash flow if receivables, inventory or equipment soak up the cash.
Common mistakes
Where it misleads
Starting from net income or EBITDA instead of operating cash flow, which skips working capital.
Treating equipment bought on finance as free, when the repayments are the capital spending.
Judging one year alone when capital spending is lumpy, such as a new truck or a fit-out.
Related terms
Keep reading
- Operating cash flowOperating cash flow is the cash a business’s normal operations bring in or use in a period, before investing and financing activity.
- EBITDAEBITDA is earnings before interest, taxes, depreciation and amortization: a measure of operating profit before financing, tax and non-cash charges.
- Cash burn and runwayNet burn is how much more cash a business spends than it takes in each month; runway is how many months its cash would last at that rate.
Stop calculating it by hand.
Dear CFO keeps your statements, forecasts and metrics current from the systems you already run.