Free Cash Flow

Free Cash Flow is one of the most important – fundamental – corporate performance indicators. By itself and as a vital component for calculating financial value of your business entity.

Free cash flow (FCF) represents the cash that a company is able to generate after making all payments (expenditures) necessary required to sustain its business. In other words, the necessary investments in current and capital operating assets.

It is essentially the money that the company could theoretically return to shareholders if the company was to grow (expand) no further. Or the amount of cash can be extracted from a company without hurting its operations. In practice, it is the money that can be either paid out to shareholders or reinvested into your company.

Free Cash Flow is calculated as:

Revenues – Expenses – Required Investments

Therefore, to maximize FCF, you have to either increase revenues, avoid costs (reduce expenses) or reduce required investments. Or do it in any combination. These options are usually represented as an acronym ‘IRACRI’. By avoiding costs and reducing investments, I obviously mean removing waste. Fat, not meat.