Definition
Cash Flow typically represents the net amount of cash and cash-equivalents that are moving into and out of a business. It measures how well a company manages the cash from its operations. On the other hand, Free Cash Flow (FCF) is a measure of a company’s financial performance, calculated as operating cash flow minus capital expenditures, showing the cash a company is able to generate after laying out the money required to maintain or expand its asset base.
Key Takeaways
- Cash Flow refers to the total money generated by a business through its various operations, it comprises of investing, operating and financing cash flows. It indicates the overall health of a business, showing if a company can generate enough cash to sustain its operations.
- Free Cash Flow, on the other hand, is a more specific component of Cash Flow, subtracting capital expenditures from operating cash flow. It represents the cash a company has left over after accounting for the money used to maintain or expand its asset base. It’s essentially the cash available for discretionary spending.
- The key difference between the two is their use and implication. While Cash Flow shows the overall liquidity of a company, Free Cash Flow could be seen as a measure of profitability, showing how efficient a company is at generating cash. Investors often pay close attention to a company’s Free Cash Flow, as it indicates how much cash is available for distribution among shareholders.
Importance
Cash Flow and Free Cash Flow are essential finance terms that assist in assessing a company’s financial health.
Cash Flow showcases the inflow and outflow of cash within a business, impacting its liquidity, while Free Cash Flow (FCF) represents the cash a company generates after accounting for cash outflows to support operations and maintain its capital assets.
It’s a surplus cash that could be used for expansion, paying off debt, or paying dividends and interest to investors.
The comparison of these two provides insights into a company’s profitability, operational efficiency, and investment sources, making them vital for investors, creditors, and others who wish to analyze the company’s financial stability and growth potential.
Explanation
Cash Flow and Free Cash Flow are dynamic financial metrics used by analysts, investors, and managers to evaluate the financial health and performance of a company. Cash Flow, in a broad sense, refers to the net amount of cash and cash equivalents moving into and out of a company. It serves as an indicator of a company’s liquidity and its ability to cover expenses, repay debts, reinvest in business operations, and return money to shareholders.
In essence, it gives a snapshot of the company’s ability to generate cash, which is vital for operational sustainability and growth. It assists in understanding where the money is coming from (operations, investments, or financing) and how it is being used. On the other hand, Free Cash Flow (FCF), a subset of cash flow, is the cash a company produces through its operations, less the cost of expenditures on assets.
FCF is an important metric because it shows how efficient a company is at generating surplus cash that can be used for potential investments, expanding operations, paying dividends, or reducing debt. Furthermore, FCF is often utilized in valuation calculations and financial modeling as it is an insightful measure of profitability that eliminates the often distracting effects of non-cash expenses. Both Cash Flow and Free Cash Flow serve a critical role in understanding the financial stability and potential for future success of a company.
Examples of Cash Flow vs Free Cash Flow
Starbucks Corporation: Cash Flow vs. Free Cash FlowStarbucks, a multinational chain of coffeehouses and roastery reserves, has an excellent example of cash flow and free cash flow. For the fiscal year end of 2021, Starbucks reported total cash flow from operating activities of approximately $82 billion USD. This figure accounts for monies received as a result of daily coffee sales, merchandise, and other activities directly related to their main business operations. However, Starbucks also had capital expenditures of roughly $38 billion USD, which were investments made towards expanding and maintaining its outlets. After subtracting the capital expenditures from its operating cash flow, the free cash flow for Starbucks was approximately $
44 billion USD. This is the money that could be used to pay dividends, buy back stock, or make further investments.Amazon Inc: Cash Flow vs. Free Cash FlowFor the year 2020, Amazon reported a total cash flow from operations of around $8 billion, revenue received from its e-commerce business, cloud services and other ventures. But, the company had significant capital expenditures. They spent about $
2 billion on things like data centers, warehouses, and other physical assets needed to keep their business running. So, their free cash flow, which is the cash that’s available for shareholders like dividends or share buybacks, was around $6 billion.Apple Inc: Cash Flow vs. Free Cash FlowApple Inc, a well-known multinational technology company, is another example. For its fiscal year 2021, the company generated $
4 billion in cash from operating activities, thanks to robust sales of its products and services. However, Apple also had capital expenditures of approximately $11 billion, which includes money invested in property, plant, and equipment. After deducting these capital expenditures, Apple’s free cash flow for the fiscal year 2021 was about $4 billion. This is the cash available to be used for paying out dividends to shareholders, repurchasing shares, or acquiring other companies.
FAQ on Cash Flow vs Free Cash Flow
What is Cash Flow?
Cash Flow refers to the total money being transferred into and out of a business, especially as affecting liquidity. It monitors all money that flows in and out from the company and is usually calculated monthly or quarterly.
What is Free Cash Flow?
Free Cash Flow (FCF) is a measure of a company’s financial performance that expresses the operating cash flow minus capital expenditures. It represents the cash a company generates after accounting for cash outflows to support operations and maintain its capital assets.
What is the key difference between Cash Flow and Free Cash Flow?
The key difference between Cash Flow and Free Cash Flow is that Cash Flow refers to the overall money being transferred in and out, while Free Cash Flow only takes into account the leftover money after a company has paid all its expenses and reinvested into the growth of the business.
Why is Free Cash Flow essential?
Free Cash Flow can be an important indicator of a company’s financial health because it represents how much cash is available for the company to repay creditors or grow its business. It’s especially important for investors as they can see a direct line to their potential dividends.
In financial analysis, which one is more important: Cash flow or Free Cash Flow?
In financial analysis, both metrics are important, but the context matters. Cash Flow delivers information about a company’s ability to generate cash, while Free Cash Flow can show how efficiently the company employs its capital. While Cash Flow provides a broader view, Free Cash Flow can offer deeper insights into financial health and efficiency.
Related Entrepreneurship Terms
- Operating Cash Flow: This is the cash generated from the main activities of a business. It indicates whether a company is able to generate enough cash to keep the business operating.
- Investing Cash Flow: This refers to the money a company either gains or loses from its investing activities, like purchasing or selling assets.
- Financing Cash Flow: This pertains to the cash received or spent through financing activities, such as issuing or repaying debt and equity securities.
- Net Cash Flow: This is the combined total of operating, investing, and financing cash flows, providing an overall view of a company’s cash position.
- Capital Expenditures (CapEx): These are the funds used by a company to acquire, maintain, and upgrade physical assets such as property, plants, and equipment. CapEx is deducted from operating cash flow to calculate free cash flow.
Sources for More Information
- Investopedia: A comprehensive online resource dedicated to investing and finance education, offering definitions, examples, and explanations of financial concepts.
- NerdWallet: An American personal finance company that offers advice on all aspects of personal finance, including understanding financial terms.
- CFO: A leading media brand for financial executives that offers in-depth coverage of financial concepts and terms.
- Khan Academy: A non-profit educational organization providing free online learning resources, which includes finance and capital markets.
