Definition: Free Cash Flow represents the cash a company generates from its operations after subtracting capital expenditures—investments in long-term physical assets like equipment, facilities, and technology infrastructure.
Think of FCF as your business's discretionary income—what remains after covering both your regular operational expenses and your long-term investments. While profits look good on paper, FCF represents actual cash available for strategic decisions.
Strong positive FCF suggests robust financial health and operational efficiency. However, negative FCF isn't always concerning—particularly for businesses in expansion phases. Companies investing heavily in growth often deliberately run negative FCF as they build capacity for future returns. In startup terminology, this negative FCF mirrors a positive burn rate.
To calculate FCF, locate your cash flow statement and subtract your capital expenditures (found under investing activities) from your net cash from operating activities. This straightforward calculation provides a powerful metric for assessing your company's true financial performance beyond traditional profit measures.
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