EBIT is also known as your operating income. You’ll need to know you’re earnings before Interest and taxes (EBIT). To calculate your FCF, you are going to need a few numbers. How do you calculate your Free Cash Flow? The FCF metric can help you see those trends so you can ensure that your company’s cash reservoir doesn’t dry up. That means you need to make sure to build up savings during high-income periods to keep operating throughout those times when income is low. If you are an ecommerce or similar type of company that experiences seasonality, you can experience times of feast and famine throughout the year. If you’re a SaaS company and you have a steady flow of money throughout the year, it can be easier to plan how you will cover your expenses. Viewing this data as a column and line chart makes it easy to see how your cash flow changes month-to-month. The green line with the points represents your FCF for each month. On this Year to Date Free Cash Flow metric, the blue columns extending upwards represent your Operating Cash Flow and the red columns extending downwards represent your Capital Expenditure. One of the added benefits of tracking your FCF is that it gives you a firm view of your overall earnings and cash flow, in addition to showing your FCF. What can I learn from a Free Cash Flow metric? Whatever you decide, knowing your FCF will help you make better financial decisions. Knowing that you have a healthy FCF creates options: You could expand, hire more employees, invest more money into product development, pay off debt faster, or add to your savings. If expenditures are higher than income in your company, you should make some changes to lower expenses, such as restructuring, revamping the product, or reworking collections. If there’s more money leaving than entering your company, it won’t be around for long, unless you have significant savings. The water left in the reservoir represents your FCF that you can use as you choose.Ĭash flow metrics can be a good indicator of company health. The water flowing out of the reservoir represents company expenses of any form. The water flowing into the reservoir represents company income of any form. If your company were a reservoir, the water flowing in and out of the reservoir would represent your cash flow. are paid, the money left over each month represents your FCF. So after the rent, salaries, utilities, taxes, debts, etc. This article focuses on Levered Free Cash Flow, but we’ll simply refer to it as Free Cash Flow (FCF).įree Cash Flow is the amount of uncommitted money a business has after covering all of its expenses (its capital expenditures and operating expenditures). Some commonly used ones include Levered Free Cash Flow (also known as Free Cash Flow to Equity) and Unlevered Free Cash Flow (also known as Free Cash Flow to the Firm). There are many terms used in the financial world to describe Free Cash Flow. The Free Cash Flow metric makes it so that you don’t have to constantly be crunching numbers to know how healthy your company’s finances are. That way you know if there’s enough cash to cover payroll, rent, utilities, and other general overhead, as well as how much uncommitted cash you have available. To do this, you need to know how much money is going into and coming out of your business. Cash is the lifeblood of your company, which is why, as a VP of finance, it’s critical to track and be aware of your Free Cash Flow.
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