00
Days
00
Hours
00
Minutes
00
Seconds
Learn how to make everyone a forecasting hero in your team ⭐ FREE webinar: Sign up
Register Now!

A guide to free cash flow - definition and formula

Read our short guide to what free cash flow is, and how to calculate it for your business.

Calculating your business's free cash flow can help understand how well your company is performing. It gives you a better idea of how much cash your business is generating. This is why we've compiled this short guide to what free cash flow is and how to calculate it.

Free cash flow - explained

When calculating your company's free cash flow, you are calculating the capital that it is generating after business expenditure (eg rent, equipment, etc) has been deducted. Being aware of your company's free cash flow can help you understand how profitable your operation is.

Free cash flow
When calculating your company's free cash flow, you are calculating the capital that it is generating after business expenditure (eg rent, equipment, etc) has been deducted.

Calculating your company's free cash flow

There are two stages of calculating your business's free cash flow. At first, you need to determine your operating cash flow. This describes the revenue your business generates (including expenditure). The formula for operating cash flow is as follows: Operating Cash Flow = Net Income + Non-Cash Items + Changes in Working Capital.

Net income describes the amount your business has left after paying expenses. Non- cash items are depreciation, amortization, stock-based compensation, losses/gains on investments, and impairment charges. And last, changes in working capital describe the difference in net working capital year over year.

In a second stage, you then calculate your free cash flow as follows: Free Cash Flow = Operating Cash Flow – Capital Expenditures.

Calculating free cash flow
There are two stages of calculating your business's free cash flow. At first, you need to determine your operating cash flow.

Interpreting your company's free cash flow

Firstly, when calculating free cash flow, a negative number is not necessarily a cause of concern. It might only mean your company has made large investments which have led to lower free cash flows. It is helpful to focus on trends in your free cash flow to get an idea of the bigger picture.

Advantages and limitations of calculating your business's free cash flow

Being aware of your company's free cash flow can help gain insight into your business's financial performance and ultimately help improve cash flow management. Also, external parties such as investors and lenders might use the figure to determine whether you are likely to eg be able to pay dividends. However, it can sometimes be hard to compare a company's financial health against another solely based on free cash flow. Different accounting policies across different organizations tend to make comparison hard, even if they all calculate free cash flow figures.

Being aware of your company's free cash flow can help gain insight into your business's financial performance and ultimately help improve cash flow management.

Start Your Free Trial

Let informed predictions and powerful reporting guide your business. Be ahead of the curve with Futrli.

Get business advice here

Our blog holds tips, how to’s and general business advice.

Accountants

How to sell accounting advisory services and add value

Discover how to sell accounting advisory services and add value with strategic insights. Learn practical tips and success stories, and leverage Futrli tools.

Accountants

How to sell accounting advisory services and add value

Discover how to sell accounting advisory services and add value with strategic insights. Learn practical tips and success stories, and leverage Futrli tools.

Business

Payroll legislation changes 2025: What businesses must know

Stay ahead of 2025 UK payroll legislation changes, including NIC, NMW, SSP & SMP updates. Understand the financial impact and ensure compliance.

Business

Mastering cash flow in Hospitality: A Guide for resilient growth

Learn how to manage cash flow in hospitality, forecast trends, and keep your business financially stable with smarter planning and real-time insights.

Business

Managing construction cash flow for resilience and growth: A comprehensive guide

Cash flow management is the backbone of every construction business. We explore solutions to keep your finances resilient

Business

Best Cash Flow Forecasting Software for Small Businesses

Discover the best cash flow forecasting software for small businesses. Get real-time insights with cashflow forecast tools and simplify financial planning today

Business

Cash flow forecasting: Why it’s critical for SMEs across all industries

Discover why cashflow forecasting is vital for SMEs in industries like construction, retail, and hospitality. Plan ahead and thrive with Futrli’s tools.

Accountants

5 tips on how to train your accountant staff to deliver advisory services

As compliance work becomes increasingly automated, clients seek more value from their accountants. Here’s how to train staff on how to deliver advisory services

Accountants

Why accountants need to embrace advisory (and how to sell it effectively)

Automation and artificial intelligence are transforming accounting. Advisory work is emerging as the next step for accountants looking to stay relevant.

Business

Chancellor Rachel Reeves's first Budget raises taxes on business but softens the blow with targeted support

At Futrli by Sage, we’re here to help you make sense of all things Autumn Budget

Business

Preparing for Big Shifts in 2025: How Futrli Can Help You Handle Rising Wages, National Insurance & Tax Costs

The Autumn Budget has introduced key changes for small businesses, here’s how Futrli can help you manage these budget changes effectively.

Accountants

How Deborah Whitaker from Not Just Numbers Uses Forecasting to Transform Small Businesses

In a recent webinar, Deborah (Debbie) Whitaker, Founder and Director of Not Just Numbers, shared her approach to delivering effective forecasting services.

Futrli News

Futrli's February 2024 Release