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.