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Free Cash Flow (FCF)
The cash remaining after operating expenses and capital expenditures, available for dividends, debt repayment, or reinvestment.
Formula
Free Cash Flow = Operating Cash Flow - Capital Expenditures
Or: FCF = Net Income + Depreciation - Changes in Working Capital - Capital Expenditures
Definition
What is Free Cash Flow?
Free Cash Flow represents the actual cash your business generates after paying for operations and maintaining or expanding your asset base. It is the cash available for strategic decisions: paying down debt, buying back shares, making acquisitions, or building a war chest.
Why FCF Matters for Founders
Profit is an opinion. Cash is a fact. A SaaS company can show accounting profits while burning cash due to timing differences in revenue recognition and collections. FCF cuts through accounting complexity to show real liquidity generation.
For ecommerce founders, FCF reveals whether your profitable P&L actually translates to cash in the bank. Heavy inventory investments can create positive net income but negative FCF, a dangerous mismatch.
FCF vs Net Income
Net income includes non-cash items like depreciation and excludes capital expenditures. FCF shows actual cash movement. Companies can have positive net income and negative FCF for years, eventually running out of money despite being profitable on paper.
Further Reading
Cash Flow vs. Profitability: The Startup Founder's Survival Guide
Example
Your ecommerce company has:
- Operating Cash Flow: $400,000
- Capital Expenditures (warehouse equipment): $100,000
Free Cash Flow = $400,000 - $100,000 = $300,000
You generated $300K in cash that could be reinvested in growth, used to pay down debt, or held as reserves. That is real money you control.
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