2017-03-29 00:00:00Finance and AccountingEnglishLearn what free cash flow is and why this number is important in gauging the financial health of your business.https://quickbooks.intuit.com/ca/resources/ca_qrc/uploads/2017/06/Accountant-Explains-To-His-Client-The-Free-Cash-Flow-Of-Her-Company.jpghttps://quickbooks.intuit.com/ca/resources/finance-accounting/free-cash-flow/What Is Free Cash Flow?

What Is Free Cash Flow?

1 min read

Free cash flow measures your company’s financial performance. This metric represents the amount of cash your business generates after you pay all its bills and reinvest the cash back into the company. You can use this cash as profits, to hire more employees, to invest in equipment, or as a way to give more money back to investors.

How Do You Calculate Free Cash Flow?

To calculate free cash flow, you take your cash from operations, such as selling goods or services, and then reduce that amount by any capital expenditures and debt that you pay. The formula for free cash flow looks like this: FCF = Cash from operations – Capital expenditures + Net debt issued.

  • Cash from operations refers to your cash on hand plus any assets you can easily turn into cash.
  • Capital expenditures include land, equipment, and infrastructure improvements that comprise a long-term investment — these expenditures improve your overall business.
  • Net debt issued includes dividends you pay to investors, wages you owe employees, lease payments, and income taxes payable within a 12-month period.

For example, you generate $150,000 cash in one month from your operations, sales, and current assets. You also spend $25,000 on new equipment and have $75,000 in net debt issued. By using the formula to crunch these numbers, your free cash flow comes to $200,000.

How Free Cash Flow Affects Your Business

When you have significant positive free cash flow, your business has greater flexibility to make investments in the business, pay down debt, and increase shareholder payouts. Positive free cash flow also lets you respond to emergencies, hire temporary help, or adjust to market forces if you need to suddenly change your business model.

Free cash flow statements let potential investors see how your company performs over a period of time. Cash flow represents a more direct measure of how money moves in and out of your business, and it gives investors and banks a look at how your company handles finances, reinvestments, and investor payouts.

QuickBooks Online lets you track income and create customized reports to gauge the financial health of your business. These tools help you simplify business decisions and plan for future growth. Join the 4.3 million customers who use QuickBooks today to help your business thrive for free.

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

Related Articles

What is Cash Flow and How Does it Affect Me?

Your business needs a steady supply of cash to operate successfully. It’s…

Read more

How to Track Revenue With Operating Cash Flow

Income can come from a variety of activities, including financing and investments.…

Read more

How to Prepare a Cash Flow Statement

Cash flow in your business can resemble the waves of an ocean, with…

Read more