SharpFokus Short Cashflow Course – Lesson 3
📌 How to Calculate Free Cashflow
⸻
🔹 What is Free Cashflow?
Free cashflow (FCF) is the most important number in business finance. It shows how much cash a company actually has available after covering operating and investment costs.
Unlike profit, which can be influenced by accounting methods, free cashflow represents real cash movement—what’s left after all necessary spending.
💡 Key Insight: A company can report high profits but still have negative free cashflow if it spends more than it earns in cash terms.
⸻
🔎 How to Calculate Free Cashflow
To calculate free cashflow, we add up:
1️⃣ Operating Cashflow – Cash generated from daily business activities (e.g., selling products, providing services).
2️⃣ Investment Cashflow – Cash spent (or received) from investments (e.g., buying equipment, acquiring assets).
3️⃣ Other Cashflows – Sometimes, companies include interest payments and lease obligations under financing cashflow instead of operating cashflow—so we adjust for that.
📌 Formula:
🔹 Free Cashflow = Operating Cashflow – Investment Cashflow ± Adjustments for Leases/Interest
⸻
📊 Why This Matters
• A company with high free cashflow can pay down debt, return money to shareholders, or invest in growth.
• A company with negative free cashflow may need to borrow money or raise equity to survive.
🚨 Accounting profit does not tell you this! A business can be profitable but still running out of cash if too much is tied up in investments or unpaid sales.
⸻
📌 Summary
🔹 Free cashflow shows the real financial health of a company.
🔹 It includes cash from operations, investments, and adjustments for financing choices.
🔹 Companies with negative free cashflow need new funding—either debt or equity.
📌 Next Lesson:
In Lesson 4, we’ll explore why cashflow and shareholder equity tend to match over time—revealing how businesses ultimately return cash to their owners.
👉 Go to Lesson 4
📌 How to Calculate Free Cashflow
⸻
🔹 What is Free Cashflow?
Free cashflow (FCF) is the most important number in business finance. It shows how much cash a company actually has available after covering operating and investment costs.
Unlike profit, which can be influenced by accounting methods, free cashflow represents real cash movement—what’s left after all necessary spending.
💡 Key Insight: A company can report high profits but still have negative free cashflow if it spends more than it earns in cash terms.
⸻
🔎 How to Calculate Free Cashflow
To calculate free cashflow, we add up:
1️⃣ Operating Cashflow – Cash generated from daily business activities (e.g., selling products, providing services).
2️⃣ Investment Cashflow – Cash spent (or received) from investments (e.g., buying equipment, acquiring assets).
3️⃣ Other Cashflows – Sometimes, companies include interest payments and lease obligations under financing cashflow instead of operating cashflow—so we adjust for that.
📌 Formula:
🔹 Free Cashflow = Operating Cashflow – Investment Cashflow ± Adjustments for Leases/Interest
⸻
📊 Why This Matters
• A company with high free cashflow can pay down debt, return money to shareholders, or invest in growth.
• A company with negative free cashflow may need to borrow money or raise equity to survive.
🚨 Accounting profit does not tell you this! A business can be profitable but still running out of cash if too much is tied up in investments or unpaid sales.
⸻
📌 Summary
🔹 Free cashflow shows the real financial health of a company.
🔹 It includes cash from operations, investments, and adjustments for financing choices.
🔹 Companies with negative free cashflow need new funding—either debt or equity.
📌 Next Lesson:
In Lesson 4, we’ll explore why cashflow and shareholder equity tend to match over time—revealing how businesses ultimately return cash to their owners.
👉 Go to Lesson 4