Use our free cash flow calculator in valuations and other financial analyses to evaluate a business’s ability to generate cash. Free cash flow is defined as cash generated by a company after counting cash outflows that support business operations and maintain capital assets. 

This available cash can be repaid to creditors or distributed as dividends or interest to investors. It isn’t the same as earnings or net income because it’s a measurement of profitability. This metric specifically accounts for working capital and expenditures on assets like equipment. 

Free cash flow is a tool to gauge the financial health of a company. It’s important to note that there are two types of free cash flow:

Free cash flow to the firm: Free cash flow to the firm is the cash inflow that’s made available to all stakeholders after taxes, expenses and depreciation. 

Free cash flow to equity: Free cash flow to equity is cash that’s made available to all equity holders after expenses, reinvestments, and debt obligations are considered. 

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How to Use The Free Cash Flow Calculator

To use this free cash flow calculator, you’ll need to add the following data: 

• Net income: You can find this information on your tax return or net income statement.
• Capital expenditures: This will appear on your balance sheet or cash flow statement.
• Change in working capital: You’ll find the NWC on your company’s cash flow statement. Subtract the cash net working capital for the previous period from the current period.
• Amortization and depreciation: Look at your tax return or net income statement.

Once you’ve added these values to the calculator, push calculate to find your free cash flow.

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How to Calculate Free Cash Flow

To calculate free cash flow manually, you can use the following free cash flow formula:   

Free cash flow = operating cash flow – capital expenditures 

Operating cash flow can be easily found in your cash flow statements where you report cash flow from operating activities.

For example, let’s calculate free cash flow where cash flow from operating activities is $25M and your capital expenditures are $5M: 

Free cash flow = $25M – $5M 
Free cash flow = $20M

If your business has significant variations in working capital each month, then the formula can be adjusted:

Free cash flow = non-cash expenses – changes in working capital 

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Benefits of Calculating Free Cash Flow

Calculating free cash flow has several important benefits for decision-makers. Not only does it give you more information about how you’re managing cash, but it also makes it easier to analyze your future capabilities.

Increased Financial Performance

Quantifying free cash flow allows business owners and other stakeholders to better understand a company’s financial state over time. Free cash flow can also help predict a business’s overall profitability and long-term sustainability.

Financial Stability

Positive free cash flow is also referred to as a cash surplus. This surplus can be reinvested into different projects or used to make acquisitions that stabilize a company’s financial state. 

In turn, greater financial stability can reassure investors if you want to move the company in a different direction or pursue a particular course of action.

Growth Opportunities

Free cash flows can be used to internally fund new opportunities for the company. A cash surplus can also support future growth strategies such as research and development or new strategic initiatives.

Debt Repayment

From paying back loans to reducing interest, free cash flows can be used to pull a business out of debt in order to stay profitable. It can also be used for share buybacks, paying dividends, and any other form of capital return.  

Investor Trust

Free cash flow is an important metric to build the confidence of advisors and investors when analyzing your company’s valuation. Your business’s ability to generate a positive free cash flow reinforces that you’re responsibly managing money without becoming overwhelmed by operating expenses.

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Frequently Asked Questions

Knowing your free cash flow will help you strategize and create a more sustainable and scalable future for your business. Let’s review some commonly asked questions that business owners often have while calculating a business’s free cash flow.

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What Is The Formula For Determining Ending Cash Balance?

Ending cash balance is the amount of cash a business has after adding in the change in cash and beginning cash balance for the fiscal period. It also appears on the cash flows statement.

This is the formula for calculating ending cash balance: 

Ending cash balance = net cash flow + opening balance

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What Is The Difference Between Operating Cash Flow And Free Cash Flow?

Operating cash flow and free cash flow are both financial metrics that are used to measure the health of a business’s performance. Operating cash flow, however, measures the revenue of a business’s core operations. Free cash flow measures remaining revenue after all cash outflows and cash expenditures.

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What Is The Difference Between Unlevered Free Cash Flow And Levered Cash Flow?

Unlevered free cash flow is the amount of cash a business has before any financial obligations or debts are paid. This can include expenses such as: 

• Capital expenditures 
• Working capital 
• Taxes 

On the other hand, levered free cash flow is the cash a company has after paying off financial obligations and debts.

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How To Calculate Operating Cash Flow

Operating cash flow is the amount of money a business generates during its normal operations. This includes both cash inflows and cash outflows. The general amounts will vary depending on a company’s industry.

This is the formula for operating cash flow: 

Operating cash flow = (revenue – operating expenses) + depreciation – income taxes – change in working capital

Analysts, creditors, and investors use operating cash flow to determine whether businesses are able to cover their short-term liabilities without running out of cash.

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What Are Capital Expenditures?

Capital expenditure is defined as a business maintaining or acquiring fixed assets. There are various types of capital expenditures to take into consideration: 

• Property and buildings: Since these types of assets will be useful to a business for several years, properties and buildings are considered to be capital expenditures.
• Equipment upgrades: Machinery used to produce goods or services will depreciate over time and eventually need to be replaced.
• Software upgrades: Similar to other tech equipment, software becomes outdated over a certain period of time and will need to be upgraded. At times, internal development of new software must also be capitalized and depreciated over the life of the asset.
• Computer equipment: Items such as servers, laptops, and desktops are also considered to be capital expenditures. For equipment to be classified as this type of expenditure, it must have a useful life greater than one year. 

Intangible assets: Not all assets need to be physical in this case. A purchased patent or license can be considered a capital expenditure.

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What Is Amortization?

Amortization is commonly used in accounting to help lower the book value of an intangible asset or the balance of a loan over a set period of time.

In some instances, amortization schedules are used. Borrowers reduce the balance of an existing loan such as a mortgage or car loan by paying in installments.

Amortization helps businesses and individuals understand their financial health and make long-term decisions about the future.

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What Is Depreciation?

Depreciation is defined as a decrease in the value of fixed assets over a set period of time due to wear and tear. Depending on the type of product, its overall value and lifespan can vary. 

Tech items or vehicles, for instance, may depreciate at a faster rate than other items due to constant innovation. There are several methods of calculating depreciation:

• Declining balance depreciation
• Double declining balance depreciation
• Straight line depreciation
• Annual depreciation
• Units of production depreciation

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Why Don’t Amortization And Depreciation Impact A Company’s Free Cash Flow?

Amortization and depreciation are non-cash expenses, so they won’t impact a company’s cash flow. This money was already spent at the initial time of purchase.

Amortization is also considered to be an intangible asset, while depreciation may apply to only physical assets.

To accurately represent a company’s cash flow, expenses can be added to the net income listed in the cash flow statement under operating activities. This will help business owners and investors accurately determine a full breakdown of cash flow for your business.