Accounting Tip: Regularly Calculate Your Business’s Free Cash Flow

By Craig Anthony

0 min read

Free cash flow (FCF) is a measure of a company’s financial performance. It represents the cash that a company is able to generate after spending necessary funds to maintain or grow its asset base. FCF is an important measure because it helps show the amount available to a company to pursue business enhancing opportunities. It is calculated as:FCF = EBIT x (1 – tax rate) + depreciation + amortization – (change in net working capital) – (capital expenditure). Assume a company has a $250,000 EBIT and has $50,000 in capital expenditures. Changes in net working capital were $30,000. Depreciation is $20,000 and amortization is $10,000. The current tax rate of the company is 30%. The FCF is:FCF = $250,000 x 70% + $20,000 + $10,000 – $30,000 – $50,000 = $125,000

References & Resources

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

Is an Accounting Franchise Right for You?

Buying an accounting franchise is one of the options available if you’re…

Read more

Niche Markets for Accounting Professionals

Finding a niche market for your accounting firm to focus on can…

Read more

How to Keep Your Small Business Cloud Accounting Even More Secure

Although cloud accounting software is one of the safest ways to store…

Read more