Free Cash Flow
What is Free Cash Flow?
Free Cash Flow is the cash a company generates after operating expenses and capital expenditures — the cash actually available to fund growth, repay investors, or extend runway.
Also known as: FCF
Free Cash Flow Formula
FCF = Operating Cash Flow − Capital Expenditures | Variable | Meaning |
|---|---|
Operating Cash Flow | Cash generated by core operations over the period. |
Capital Expenditures | Cash spent on long-lived assets such as equipment or capitalized software. |
How to Calculate Free Cash Flow
Worked example
- Operating Cash Flow
- $500,000
- Capital Expenditures
- $100,000
- Revenue (same period)
- $2,000,000
- → Free Cash Flow
- $400,000
- → FCF Margin
- 20%
Free Cash Flow Calculator
FCF = Operating Cash Flow − Capital Expenditures | Variable | Meaning |
|---|---|
Operating Cash Flow | Cash generated by core operations over the period. |
Capital Expenditures | Cash spent on long-lived assets such as equipment or capitalized software. |
Worked example
- Operating Cash Flow
- $500,000
- Capital Expenditures
- $100,000
- Revenue (same period)
- $2,000,000
- → Free Cash Flow
- $400,000
- → FCF Margin
- 20%
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Common Mistakes with Free Cash Flow
- Confusing FCF with profit: a SaaS company collecting annual prepayments can be FCF-positive while showing accounting losses, and vice versa.
- Ignoring capitalized software development — moving engineering cost from opex to capex flatters operating cash flow but not FCF.
Free Cash Flow FAQ
What is Free Cash Flow?
Free Cash Flow is operating cash flow minus capital expenditures: the cash left over after running the business and maintaining its assets. It funds growth, buybacks, debt repayment — or, for startups, determines how fast the runway shrinks.
How do you calculate FCF margin?
Divide free cash flow by revenue for the same period. $400K of FCF on $2M of revenue is a 20% FCF margin — the profitability number most commonly used in the Rule of 40.
Why does FCF matter for SaaS valuations?
Public SaaS investors increasingly price efficiency: FCF margin feeds the Rule of 40, and durable FCF generation supports premium revenue multiples.
More questions? See the full Free Cash Flow FAQ.