GlossaryWhat is free cash flow?

What is free cash flow?

Free cash flow refers to the level of unencumbered funds available to a business.

Cash flow is the lifeblood of any business. It allows a business to keep trading and cover liabilities and expenses. If you don’t have a good handle on cash flow, your business may find itself in strife.

Free cash flow (definition)

Free cash flow is a good measure of a business’s ability to generate cash from its operations that’s freely available for debt repayment or future investments.

Free cash flow is calculated by subtracting capital expenditures from operating cash flow.

Free cash flow represents the cash a company has left over after maintaining and expanding its asset base. It is a key indicator of a business’s financial health and flexibility.

Free cash flow formula

Calculating free cash flow is a simple affair, simply use the following formula:

What is profit?

Free Cash Flow = Operating Cash Flow − Capital Expenditures.

What’s operating cash flow?

Operating cash flow is the cash generated or used in a business’s primary activities, such as the sale of goods and services.

Operating cash flow provides insight into a business’s ability to generate cash from regular business operations.

​See related terms
What is cash flow?
What is working capital?
What is marginal cost?
What are fixed assets?

Additional resources

Disclaimer
This glossary is intended for small business owners and contains definitions suited to their needs. For more comprehensive explanations, we recommend consulting an accounting or bookkeeping professional. Reckon does not offer accounting, tax, business, or legal advice.

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