Free Cash Flow

Free cash flow (FCF) is calculated by taking the cash flow from operating activities and deducting the investment in property, plant, and equipment (capital expenditure). The free cashflow formula is

Free Cash Flow Formula

Free cash flow = Operating cash flow – Capital expenditure

Strictly speaking the capital expenditure used in the calculation is the amount required to maintain the growth of the business at the current rate. In practice this figure is not generally available, and it is normal to use the total capital expenditure figure in the financial statements.

The purpose of free cashflow is to see what cash is available (free) from the operations of the business after allowing for cash to maintain the current growth rate. This free cash flow is then available to improve growth by taking advantage of expansion opportunities, to invest in new products, and to reduce debt and pay dividends to equity providers.

Free Cash Flow Calculation

If we look at the basic cash flow statement below, the highlighted elements represent the main components of free cashflow of the business.

Cash Flow Statement and Free Cash Flow
Net income 50,000
Add back depreciation 12,000
Working capital -5,000
Operating activities 57,000
Capital expenditure -30,000
Investing activities -30,000
Debt repayments -10,000
New debt 26,000
New capital 12,000
Financing activities 28,000
Net cash flow 55,000
Opening cash balance 10,000
Closing cash balance 65,000

In the above free cashflow example, the operating cash flow is 57,000, and the amount spent on capital expenditure is 30,000.

The free cashflow is calculated by deducting the capital expenditure from the operating cash flow, which gives FCF of 57,000 – 30,000 = 27,000.

Our free cash flow calculator is available to help you carry out the calculation.

Free Cash Flow November 6th, 2016Team

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