It’s tricky to decipher the ability of a company to generate cash just by looking at the Cash Flow Statement, the Balance Sheet, and the Income Statement. So the Free Cash Flow (FCF) formula uses numbers from your financial statements to calculate your company’s Free Cash Flow or FCF.
The FCF shows a company’s ability to generate cash. It’s the cash left over after paying for operating expenses and capital expenditures. It shows the efficiency of cash generation and is something investors are particularly interested in. FCF is the number most commonly used to assess and value a company.
Calculate Using Cash Flow Statement
To calculate the FCF, take Cash Flow From Operations (CFO) and subtract estimated capital expenditures (CapEx).
FCF = CFO – CapEx
Calculate Using Income Statement & Balance Sheet
If you don’t have the Cash Flow Statement ready, you can also calculate FCF using the Income Statement.
Start with Net Income then add any non-cash expenses (like depreciation and amortization), subtract change in working capital and then subtract CapEx.
How to Use the FCF?
With the Free Cash Flow formula, you’ll be able to further monitor the financial health of your company.
As a business owner, Free Cash Flow is something to keep in mind as you grow. Make sure your company’s financial position stays healthy. Ask your bookkeeper or accountant for help calculating these formulas if you have questions. And remember that if you plan to sell your business someday, this is a metric potential buyers will look at.