Free Cash Flow Formula

5 minute read

Business owners want clarity about their company’s financial health, and a financially healthy business means growth. A major player in business growth is free cash flow, but understanding what this is and how to calculate it can be tricky.

Understanding free cash flow helps business owners plan for future growth and if the company is incorporated, plan for investments that would improve shareholder value. Free cash flow can be used in a business plan as part of financial planning and forecasting.

What is free cash flow?

Free cash flow (FCF) is a measurement of a business’s financial health and performance. It is all the financial assets left after deduction of operating costs (wages, supplies, overhead) and purchasing assets (equipment, property, other major investments).

Free cash flow is a measurement of available cash that can be distributed among investors or used for other business growth purposes. A healthy level of free cash flow is the ideal position that every entrepreneur wants to be in.

How to calculate free cash flow

There are a few ways to calculate free cash flow, but for the most part, it’s fairly simple. The most commonly used formula is:

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Free cash flow = operating