6 min read Those familiar with the term "free cash flow," have typically encountered it in use with regard to investing. Key Takeaways Free Cash Flow In Your Business: Free cash flow is the amount of cash (operating cash flow) which remains in a business after all expenditures (debts, expenses, employees, fixed assets… Free Cash Flow Compared to Other Valuation Metrics: This metric is basically free cash flow adjusted for debt. FCFE measures the equity value of a company, in other words the amount of money available to… Enhance Your Free Cash Flow With GrowthForce Outsourced Accounting Services: Outsourced accounting can significantly enhance your free cash flow by streamlining financial processes and optimizing resource allocation… Free cash flow, however, is also an integral measurement tool in management accounting. This metric allows business owners, managers and board members to measure and monitor a company's present value to track growth, encourage expansion and avoid failure. The simplest definition of free cash flow is the amount of leftover money in a company. Free cash flow is the amount of cash (operating cash flow) which remains in a business after all expenditures (debts, expenses, employees, fixed assets, plant, rent etc.) have been paid. Free cash flow represents a company's current cash value (not considering growth potential). Although they sound similar, the two are quite different. Free cash flow (FCF) equals cash from operations (CFO) minus capital expenditures (CapEx). FCF = CFO – CapEx Although the equation appears simple, free cash flow can be a daunting metric to calculate because you must first calculate your company's cash from operations and determine its capital expenditures, using information from your company's balance sheet and/or cash flow statement. Read More: Save Your Small Business With These Cash Flow Strategies First, you must determine your company's cash from operations. CFO = Net Income + Non-Cash Expenses +/– Change in Non-Cash Net Working Capital These are all of the items (adjustments) on an income statement which do not actually affect cash. Non-Cash Expenses = Depreciation + Amortization + Gains/Losses on Investments + Stock-Based Compensation + Impairment Charges Accurately calculating this change can be tough. Accounts receivable (AR), accounts payable (AP) and inventory are the three items which most commonly affect fluctuations in net working capital. Change in Non-Cash Net Working Capital = (Current Period AR – Prior Period AR) + (Current Period Inventory – Prior Period Inventory) – (Current Period AP – Prior Period AP) Finally, you must determine the company's capital expenditures. You can do so with line items (Property, Plant and Equipment (PP&E), depreciation and amortization) from the company's balance sheet. CapEx = Current Period PP&E – Prior Period PP&E + Depreciation + Amortization As you can see, the equation for free cash flow is quite cumbersome. Free Cash Flow = Net Income + (Depreciation + Amortization + Gains/Losses on Investments + Stock-Based Compensation + Impairment Charges) – ((Current Period AR – Prior Period AR) + (Current Period Inventory – Prior Period Inventory) – (Current Period AP – Prior Period AP)) – (Current Period PP&E – Prior Period PP&E + Depreciation + Amortization) Typically, this single equation is simplified by calculating each of its components separately. So, the commonly accepted equation for free cash flow is: Free Cash Flow = Cash from Operations – Capital Expenditures Although these can all be useful metrics in valuing a company, free cash flow provides the most accurate and objective estimate of a company's present value, the cash leftover. The best-run companies are data-driven. Build an accounting package that helps your business grow. Learn more about our a la carte menu of services. Free cash flow is a number usually discussed from the perspective of investors. Free cash flow, however, is also an important number for business owners – even those who are not looking to raise capital by selling equity. Positive or negative free cash flow can sometimes indicate a company's health. By tracking your company's free cash flow, you can also measure your business's growth and success. Owners of companies with consistently positive free cash flow enjoy a multitude of options regarding how to use the leftover money. Free cash flow can be used to expand operations, bring on additional employees or invest in additional assets, and it can be put toward acquisitions or paid out in dividends to shareholders. Having too much free cash flow, however, can indicate that a business is not properly leveraging its assets, as excess funds could be put toward expansion. On the other hand, the owner of a business with negative free cash flow should evaluate why FCF is negative. If the business has negative free cash flow because "extra" money is consistently reinvested for growth, then the negative number is a reflection of that growth strategy. When cash flow shortages are to blame, however, negative FCF could be a cause for concern. A business owner, plagued with negative free cash flow as a result of a cash flow shortage, might need to restructure operations or raise capital by taking on additional debt, selling equity or investing personal funds. In addition to monitoring their income statements, balance sheets and cash flow statements, business owners can use free cash flow to take the temperature of their businesses, measure growth and make data-driven decisions to drive profits. Outsourced accounting can significantly enhance your free cash flow by streamlining financial processes and optimizing resource allocation. By entrusting accounting tasks to specialized professionals, you can minimize operational inefficiencies, reduce overhead costs, and eliminate the need for extensive in-house accounting infrastructure. This allows your business to focus its resources on core revenue-generating activities. Additionally, outsourced accounting experts can provide accurate financial insights and analyses, enabling informed decision-making that aligns with your cash flow objectives. With a well-managed financial framework, you can better predict and manage cash inflows and outflows, ensuring optimal liquidity and capital availability for strategic investments and operational expansion.What Is Free Cash Flow In Your Business?
Cash Flow Versus Free Cash Flow – How Are They Different?
How to Calculate Your Company's Free Cash Flow
Cash from Operations
Non-Cash Expenses
Change in Non-Cash Net Working Capital
Capital Expenditures
Put It All Together to Determine Free Cash Flow
Free Cash Flow Compared to Other Valuation Metrics
Use Your Free Cash Flow to Grow Your Business
How To Increase Free Cash Flow In Your Business
Enhance Your Free Cash Flow With GrowthForce Outsourced Accounting Services