Free Cash Flow
Definition
The cash your business produces from operations after paying for capital investments. It is the money truly available for debt payments, distributions or growth.
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Formula
Free Cash Flow = Operating Cash Flow − Capital ExpendituresProfit is an opinion; free cash flow is a fact. It shows whether the business is funding itself or quietly depending on loans and owner money.
For inventory brands, a growth year often shows strong profit and weak free cash flow because cash went into stock. Watch for: years of positive profit with negative free cash flow, which needs a funding plan.
Example
Operating cash flow of $220,000 minus $40,000 of equipment purchases gives $180,000 of free cash flow.