Controlling the money going into and out of the company should be one of the top priorities of a business owner. Such cash flow is the source of any business’s development since income generation ensures smooth operation. Using free cash flow is an excellent way to optimize a company’s cash flow.
What is free cash flow, and what do you need to know to calculate it?
Cash flow demonstrates the movement of cash or money into and out of a company through operating, investing, and financing activities. Free cash flow (FCF) is the total cash on hand that remains after accounting for these cash outflows from operations.
To calculate free cash flow, you need to collect financial information about the business below:
- Net income is the income left over from total income used to cover all business expenses, including interest payments and taxes.
- Depreciation and amortization: this includes the assets of the enterprise, which lose their value over time.
- Working capital: shows the difference between a business’s current assets and liabilities or cash flow used for operating activities.
- Capital expenditures: money used to acquire the fixed assets of a business, such as property, plants, and equipment.
- Operating cash flow: cash generated or used in the day-to-day activities of an enterprise.
Businesses use cash flow analysis to determine their cash position. Such research offers a more accurate view of their cash inflows and outflows compared to other financial papers such as income statements or balance sheets.