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Free Cash Flow (FCF)
Cash generated by operations minus capital expenditures, representing cash available for investors and debt repayment.
Formula
Free Cash Flow = Operating Cash Flow - Capital Expenditures
Or: FCF = EBITDA - Taxes - Change in Working Capital - CapEx
Definition
What is Free Cash Flow?
FCF is the cash a business generates after accounting for cash outflows to support operations and maintain capital assets. It's the money available for dividends, debt paydown, acquisitions, or reinvestment.
FCF vs Net Income
Net income includes non-cash items (depreciation) and doesn't account for capital needs. FCF shows actual cash generation. A company can be profitable on paper but FCF negative if it's constantly reinvesting.
FCF for Startups
Early-stage companies often have negative FCF while building. That's expected. But understand the path to positive FCF and how much capital you'll need to get there.
Example
SaaS company cash flow:
- Operating Cash Flow: $800,000
- Capital Expenditures: $200,000
Free Cash Flow = $800K - $200K = $600,000
This $600K is available for debt repayment, dividends, or strategic investment.
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