Typically, the higher the FCF, the better. Fixed assets your business owns may include buildings (for brick-and-mortar businesses), company vehicles, equipment, and land. What is CAPEX? Capital expenditures are spent on the purchase, maintenance, or improvement of fixed assets. Net income tells you how much cash a business has generated without subtracting CAPEX. The cash generated is earned after including expenses associated with standard business operations.įCF excludes non-cash expenses and includes equipment, capital, and assets - net income, on the other hand, does not. In accounting, we call this earned cash operating cash flow (OCF), and the cash spent is capital expenditures (CAPEX). It indicates your business’s financial performance and health, and ability to stay in business. So today, we’re talking about free cash flow: the definition, why it’s important, and how to calculate it.įree cash flow (FCF) is the difference between cash generated from standard business operations and cash spent on assets. There are different metrics and formulas you can use to give you a more accurate insight into your business’s actual profitability, both now and in the future. This is where small business accounting comes in. It doesn’t reveal the money spent on software subscriptions, conferences, payment processing fees, and hiring independent contractors. The amount you invoice doesn’t tell the full picture. As a small business owner, it’s easy to get caught up in the amount you’ve invoiced.
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