# Free Cash Flow

Free cash flow (FCF) is calculated by taking the cash flow from operating activities and deducting the investment in property, plant, and equipment (capital expenditure). The free cashflow formula is

## Free Cash Flow Formula

Free cash flow = Operating cash flow – Capital expenditure

Strictly speaking the capital expenditure used in the calculation is the amount required to maintain the growth of the business at the current rate. In practice this figure is not generally available, and it is normal to use the total capital expenditure figure in the financial statements.

The purpose of free cashflow is to see what cash is available (free) from the operations of the business after allowing for cash to maintain the current growth rate. This free cash flow is then available to improve growth by taking advantage of expansion opportunities, to invest in new products, and to reduce debt and pay dividends to equity providers.

## Free Cash Flow Calculation

If we look at the basic cash flow statement below, the highlighted elements represent the main components of free cashflow of the business.

 Net income 50,000 Add back depreciation 12,000 Working capital -5,000 Operating activities 57,000 Capital expenditure -30,000 Investing activities -30,000 Debt repayments -10,000 New debt 26,000 New capital 12,000 Financing activities 28,000 Net cash flow 55,000 Opening cash balance 10,000 Closing cash balance 65,000

In the above free cashflow example, the operating cash flow is 57,000, and the amount spent on capital expenditure is 30,000.

The free cashflow is calculated by deducting the capital expenditure from the operating cash flow, which gives FCF of 57,000 – 30,000 = 27,000.

Our free cash flow calculator is available to help you carry out the calculation.

Free Cash Flow November 6th, 2016

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