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The Guide to Free Cash Flow: What it Means and Why it Matters

May 24, 2022

Free cash flow (FCF) represents the cash available to repay creditors and pay out dividends and interest to investors from the company. FCF works by reconciling net income by adjusting for non-cash expenses, adjustments or changes in working capital, and capital expenditures. FCF is also used to reveal problems in the fundamentals before they reach the income statement. 

As free cash flow accounts for adjustments and changes in working capital, it can provide insights into the value of your company and the health of fundamental trends. 

What is Free Cash Flow (FCF)?

Free cash measures how much cash is generated by a business after capital expenses have been paid. Capital expenses could include things such as buildings and equipment. FCF is used in a variety of ways, including debt repayments, additional dividends to investors, and business expansion. Smaller businesses typically do not focus on free cash flow and focus instead on other bookkeeping tasks.

FCF is calculated in two forms: levered free cash flow and unlevered free cash flow. While levered FCF indicates the amount of cash your business has after paying all business related expenses, unlevered FCF is the amount of cash your business has before expenses.

How Does Free Cash Flow (FCF) Assist in Cash Flow Forecasting?

FCF accounts for working capital and can provide important insight to the value of your company and current trends. This includes changes in yours accounts payable (outflow) and accounts receivable (inflow).  Changes in ouflow/inflow can indicate unsold products, changes in profitability and demand, and overall management of how your business is handling – or not handling – changes in trends. 

Tracking your free cash flow is simply another tool to assist in managing your cash flow. It allows you to make informed decisions as a business owner and ensure that you know exactly where your business will be in a month to even three months from now. If you are unsure in your understanding of cash flow, listen to our guide here or apply for a consultation with us directly.

How Do I Use Free Cash Flow (FCF) to Improve My Business?

It’s likely that you are already utilizing your free cash flow to make improvements and investments in your business, but you are not accurately and efficiently tracking it. As stated above, FCF is the money left in your account after your expenses are paid. This money can be invested in stocks, invested back into your business for better systems, used to outsource tasks if you are seeing consistent trends, and more. 

Connect with ModVentures to accurately track your cash flow to make better decisions in your small business today.


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