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The free cash flow measures the amount of cash flow available for a business to use for growth and to take advantage of expansion opportunities.
The Excel free cash flow calculator, available for download below, is used to compute free cash flow by entering details relating to the net credit sales and the opening and closing accounts receivable balances.
The payback period is the time it takes to earn back the cash invested in a project. It allows a business to determine how long it will take before a project will recover it’s original investment. The simple payback period, is a useful tool for a business to compare projects. Using the payback period method, the business would choose the project which has the shortest cash payback period.
Free cash flow (FCF) is calculated by taking the operating cash flow and deducting the capital expenditure.
The purpose of free cash flow 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, invest in new products, and to reduce debt and pay dividends to equity providers.
In order to manage its cash flow a business needs to understand the working capital calculation. Working capital is the amount of cash needed to fund the normal day to day trading operations of the business. In a simple business it would be calculated as Inventory + Accounts receivable – Accounts payable representing the funding needed to buy inventory and provide credit to customers reduced by the amount of credit obtained from suppliers.
Operating cash flow is that part of the cash flow generated by the trading activities of the business. It is basically the net income of the business adjusted for depreciation and amortization, and movements in working capital (inventory, accounts receivable, and accounts payable). It represents cash in from selling goods and services less cash out from paying the costs of selling goods and services.
