A:

Cash flow refers to a stream of revenue or expense that alters a cash account over a specified time frame. Free cash flow (FCF) is a measure of a business’s financial performance. It is calculated as the difference between cash flow and capital expenditures.

Cash inflows result from any of the following three activities: financing, investments or operations. Cash outflows, on the other hand, result from expenses or investments. A statement of cash flows is an accounting statement that shows the amount of income generated and used by the business in a given time period. It is calculated by summing non-cash charges including depreciation, with net income after taxes. The data used in the statement of cash flows are obtained from the business’ balance sheet.

FCF shows how much cash a company generates after accounting for capital expenditures, such as buildings and equipment. It is a representation of cash that a business is able to generate after laying out the money needed for expansion of its asset base. The importance of FCF is that it allows the business to take advantage of opportunities that increase shareholder value. It is impractical to create new products, pay dividends, make acquisitions or reduce cost when there is no cash.

FCF = Operating cash flow – capital expenditures.The data used for calculating a company’s free cash flow is usually obtained from its cash flow statement. For instance, if company ABC’s cash flow statement recorded \$20 million from operations and \$10 million of capital expenditures for the year: Company ABC’s free cash flow (FCF) = \$20 million - \$10 million = \$10 million.

RELATED FAQS
1. ### Free & operating cash flows: What's the Difference?

Learn the difference between free cash flow and operating cash flow. Explore how analysts use earnings and cash flow to evaluate ... Read Answer >>
2. ### Are taxes calculated in operating cash flow?

Learn how taxes are involved with the calculations for a firm's operating cash flow, and the overall significance of operational ... Read Answer >>
3. ### What is the difference between cash flow and revenue?

Understand the difference between cash flow and revenue as they relate to corporate accounting and the financial evaluation ... Read Answer >>
4. ### What are some examples of cash flow from operating activities?

Learn about cash flow statement and cash flows from operating activities. Understand how these examples differentiate investing, ... Read Answer >>
5. ### What is the difference between operating cash flow and net income?

Learn how net income is an income statement for a certain period of time, while cash flow shows inflows and outflows based ... Read Answer >>

Related Articles
1. Investing

### Free Cash Flow: Free, But Not Always Easy

Free cash flow is a great gauge of corporate health, but it's not immune to accounting trickery.
2. Investing

### Corporate Cash Flow: Understanding the Essentials

Tune out the accounting noise and see whether a company is generating the stuff it needs to sustain itself. Learn how to read the cash flow statement.
3. Investing

### Fundamental Case Study: Is Amazon's Cash Flow Actually Solid? (AMZN)

Review Amazon's cash flow situation, including its free cash flow yield, operating cash flow from organic growth and cash flow from debt financing.
4. Investing

### Cash Flow From Investing

Cash flow analysis is a critical process for both companies and investors. Find out what you need to know about it.

### Understanding Cash Flow

Learn about the different types of cash flows and the importance for businesses to properly manage their cash flows.
6. Tech

### Cash Flow Is King: How to Keep it Running

Why is cash flow so important, and what steps can a business take to improve it?
7. Investing

### Cash Flow Indicator Ratios

Learn about the operating cash flow to sales ratio, free cash flow to operating cash flow ratio and free cash flow coverage ratio.
8. Investing

### Cash flow statement: Analyzing cash flow from investing activities

Here, you'll find an overview of cash flow from investing activities — one of three primary categories in the statement of cash flows.
RELATED TERMS
1. ### Trailing FCF

Trailing free cash flow (FCF) measures the company's free cash ...
2. ### Price to Free Cash Flow

Price to free cash flow is an equity valuation metric used to ...
3. ### Cash Flow Statement

A cash flow statement is a financial statement that provides ...
4. ### Cash Flow From Investing Activities

Cash flow from investing activities reports the total change ...
5. ### Free Cash Flow Yield

Free cash flow yield is a financial ratio that standardizes the ...
6. ### Cash Position

The amount of cash that a company, investment fund or bank has ...
Hot Definitions
1. ### Intrinsic Value

Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
2. ### Current Assets

Current assets is a balance sheet account that represents the value of all assets that can reasonably expected to be converted ...
3. ### Volatility

Volatility measures how much the price of a security, derivative, or index fluctuates.
4. ### Money Market

The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
5. ### Cost of Debt

Cost of debt is the effective rate that a company pays on its current debt as part of its capital structure.
6. ### Depreciation

Depreciation is an accounting method of allocating the cost of a tangible asset over its useful life and is used to account ...