How Do I Calculate the Free Cash Flow of a Business?

Kevin Scott Woolf
How Do I Calculate the Free Cash Flow of a

The chief financial officer of Taylor Capital Holdings LLC and Tom Wolf Co., LLC, Kevin Scott Woolf handles all filings of documents and management of records and books at both companies. Beyond that, Kevin Scott Woolf oversees the identification, purchasing, and management of both properties and companies that generate free cash flow (FCF).

A ratio that creditors and investors use to analyze businesses, FCF looks at the amount of cash generated by a business, along with that company’s capital expenditures (CapEx), to determine how much cash remains under a business’ control after its expenses are paid.

Simply put, FCF is calculated by subtracting a company’s CapEx from its operating cash flow. Figuring out CapEx is relatively simple since it includes any funds used by a business to acquire, maintain, or upgrade its physical assets. These physical assets may be such things as a company’s technology, property, or equipment. Typically, CapEx are recorded on balance sheets as investments, though they are also recorded on income statements as depreciation expenses.

Determining operating cash flow is a bit most complicated since it is comprised of net income, non-cash expenses, and changes in working capital. Net income often serves as the base of the calculation and includes everything from the company’s sales revenue, taxes, and interest expenses. Meanwhile, non-cash expenses are items on the income statement that do not affect the total cash of a business. This includes depreciation and amortization, along with investment gains and losses. These components are generally added together.

Working capital changes are then either subtracted or added to the sum of net income and non-cash expenses based on the change seen. Increases in working capital, for instance, are typically subtracted from the sum, while decreases are added to it. Calculating these changes is often the most complicated component to determine since it occurs over two years and may involve looking at several income statements and balance sheets instead of just one.

Source link