What it is: Free Cash Flow (FCF) is the cash generated by a company's operations after accounting for operating expenses and capital expenditures. It represents the cash available for distribution to shareholders, debt repayment, or reinvestment in the business. FCF is a crucial metric for evaluating a company's financial health and ability to generate cash.
Why it is important: FCF provides insight into a startup's cash-generating capacity and ability to finance growth initiatives, invest in research and development, or return value to shareholders. It helps assess a company's financial flexibility, solvency, and potential for future investments or distributions.
Formulas: FCF is typically calculated as Operating Cash Flow minus Capital Expenditures. The formula is FCF = Operating Cash Flow - Capital Expenditures.
How to use it in the context of startups: Startups can use FCF to evaluate their financial performance and sustainability. By analyzing FCF, startups can assess their ability to generate cash from operations, fund growth initiatives, repay debt, or distribute dividends. Monitoring FCF trends over time helps startups understand their cash flow dynamics and make informed investment, cost management, and capital allocation decisions.
