Free Cash Flow: 5 Easy steps to learn how to calculate
Free Cash Flow: 5 Easy steps to learn how to calculate
Any business will eventually require the use of external financing in its life cycle. Usually, the expansion of a company requires the participation of capitalist partners; Success in resource acquisition requires the company to demonstrate its ability to generate free cash flow (FCL).
The main function of a business manager is to ensure that revenues are higher than expenditures; When the opposite happens the FCL is negative and the company runs the risk of failure do you know how much the free cash flow of your business is?
The following explains what the free cash flow is and how to calculate it
Free cash flow is an indicator of the financial performance of a business. It measures the amount of cash that a company is able to generate after deducting the amounts of money needed to maintain or expand its asset base.
In other words, the FCL measures the capacity of a business to generate what is most interesting to their financier: cash for the remuneration of the capital contributed by the partners.
How to calculate free cash flow
A simple way to calculate the free cash flow is as follows:
Subtract the total sales costs and overhead to obtain the gross operating margin (MOB).
Subtract the number of amortizations from the MOB to obtain the benefits before interest and taxes (BAIT).
Get the Net profit (BN), minus al BAIT taxes
Determine the operational needs of funds (NOF) = box + clients + inventories – suppliers.
Calculate the FCL = BN + amortization – Acquisition of fixed assets – investment in NOF
Importance of free cash flow
If a series of FCL data reveals an increased trend over the years it indicates that the business gains are increased; It is likely that the company will continue to do well in the next few years.
A business that reflects a decrease in its FCL, in recent years, indicates a decrease in profit; It is likely that you should make great changes to retake the path of success.
A positive FCL is a financial health indicator that increases shareholder value. Without money, the possibilities for a business to develop new products are limited, pay dividends or reduce their obligations.
Observing the free cash flows of several years of business helps to identify whether you are doing well or bad.
