What is free cash flow?

Posted: May 24, 2013 in Up-and-running Business

Free Cash Flow (FCF) is the residual after financing activities have been covered. The cash profit (aka – Cash Flow From Operations – CFFO) adjusts accrual accounting income – taking out amortization and adjusting for changes in receivables and payables. The CFFO should provide enough residual cash to cover the principal payment on term loans or mortgages.

The remainder (after Financing Activities have been satisfied) is free cash flow. The free cash flow can be used to:

  1. Repay shareholder loans – as long as there are no loan covenants in place.
  2. Declare a dividend.

The problem with FCF is that not many business owners understand the term let alone its significance.

If your business is fortunate enough to have FCF, put it to work in your favour.

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