Formula
How to Calculate Free Cash Flow
Cash generated by a business after accounting for capital expenditures — a measure of true financial health and the basis for many valuation models.
Free Cash Flow
FCF = Operating Cash Flow - Capital Expenditures
Where
- OCF
- = Cash from operating activities
- CapEx
- = Capital expenditures (PP&E, etc.)
What Is Free Cash Flow?
Free Cash Flow (FCF) is the cash a company generates from operations minus capital expenditures (CapEx) required to maintain or grow the business. FCF = Operating Cash Flow - CapEx. Unlike EBITDA (which adds back depreciation and amortization but not CapEx), FCF reflects actual cash available to the company. For VC-backed growth companies, FCF is typically negative (they're investing aggressively in growth). FCF becomes critically important as companies scale toward profitability — investors evaluate 'free cash flow inflection' as a key milestone. Public software companies are increasingly valued on FCF multiples rather than revenue multiples. Strong FCF generation gives companies flexibility: fund growth internally, return capital to investors, or make acquisitions.
Worked Example
SaaS startup CloudCorp generates $10M in operating cash flow this year after paying all expenses and collecting from customers. However, they also spent $2M on new servers, office buildout, and equipment to support growth. Their free cash flow is $8M ($10M - $2M). This $8M represents the actual cash available to reinvest in growth, pay down debt, or distribute to shareholders. While CloudCorp shows $12M in revenue and $3M in net income on paper, the $8M free cash flow tells the real story of cash generation after necessary reinvestments, making it crucial for valuation models and investor analysis.
Why Free Cash Flow Matters
Free cash flow reveals a company's true financial health beyond accounting metrics that can be manipulated through timing and non-cash items. For growth companies, FCF shows whether the business can fund its expansion without constantly raising capital. Negative FCF isn't automatically bad for startups investing heavily in growth, but investors want to see a clear path to positive FCF as the business matures. Many seemingly profitable companies have failed because they couldn't generate positive free cash flow, while others with accounting losses thrived due to strong cash generation.
Related Terms
Frequently Asked Questions
How do you calculate Free Cash Flow?
Free Cash Flow is calculated using the formula: FCF = Operating Cash Flow - Capital Expenditures. Cash generated by a business after accounting for capital expenditures — a measure of true financial health and the basis for many valuation models.
What is a good Free Cash Flow?
What constitutes a "good" Free Cash Flow depends on context — the fund's stage, vintage year, and strategy. Check our benchmarks and calculators for specific ranges.