Free Cash Flow

Free cash flow is the cash generated by the business, after paying its expenses and investing for future growth. It is the cash left after subtracting capital expenditure from operating cash flow. The term “free cash flow” is used because this cash is free to be paid back to the suppliers of capital.

Alert: In the child care business example above, the cash generated by the business after operating and investing activities is below the level of $0. This indicates that the business is not generating sufficient cash flow to pay its tax, interest, dividends & debt repayments, which must be paid from the free cash flow.