Free cash flow is the metric that shows how much cash a business genuinely has left over after the investment it needs to make to keep running. Operating cash flow only captures day-to-day trading; free cash flow nets out capital expenditure as well — answering a question that matters equally to lenders, owners and a company’s own financial planning: how much is actually available to repay debt, distribute to shareholders, or set aside as a reserve?
This guide sets out the free cash flow formula, draws a clean line between it and the related but distinct gross and net cash flow, works through an example, and closes by placing the metric next to operating cash flow and liquidity — what it is good for, and what it is not.
What is free cash flow?
Free cash flow measures how much cash a business generates from its core operations once the capital expenditure needed to run that business has been deducted. The starting point is operating cash flow — the cash a company’s core business generates. Free cash flow then subtracts spending on property, plant, equipment and intangible assets, commonly called capex (capital expenditures).
The metric matters because a business cannot defer that spending indefinitely without losing ground over time — machinery has to be replaced, IT systems renewed, capacity expanded. Only what remains after those necessary outlays is genuinely free: available to repay loans, distribute to shareholders, or build a cash reserve.
How to calculate free cash flow
The most common formula for free cash flow starts from operating cash flow:
| Free cash flow | Operating cash flow − capital expenditure (capex) |
You can derive operating cash flow directly or indirectly — both methods are covered in detail in how to calculate cash flow, and you can run your own numbers through the free cash flow calculator. Capital expenditure corresponds to the part of investing cash flow — the section of the cash flow statement — that covers spending on fixed and intangible assets, as opposed to financial investments such as buying a stake in another company. Practice varies on whether to fold financial investments into capex; what matters is applying the same definition consistently inside your own business.
LiquidityLens turns your real bank transactions, open items and accounting data into a week-by-week 13-week outlook — instead of only explaining the past.
See the Liquidity Control SprintGross and net cash flow: a second distinction
Alongside free cash flow, you will often run into gross cash flow — a different metric that is easy to confuse with free cash flow because both share the word “cash flow” but answer different questions.
Gross cash flow is a variant of the indirect cash flow method: it starts from net income and adds back non-cash expenses — chiefly depreciation and additions to long-term provisions — before any distribution to shareholders is deducted.
| Gross cash flow | Net income + depreciation + additions to provisions |
| Net cash flow | Gross cash flow − distribution |
Net cash flow then deducts the distribution actually paid out, showing what internal financing capacity remains in the business after paying shareholders. Both figures start from the same base as operating cash flow under the indirect method, but focus on the distribution rather than on investment — the opposite of free cash flow, which deducts capital expenditure and leaves the distribution question open. In company analysis and bank credit ratings, gross/net cash flow is often used as a quick approximation of internal financing capacity, while free cash flow is used as a measure of the cash genuinely available for investment and debt repayment.
Worked example
The example below shows both metrics for a fictional company. The figures are generic example values used only to illustrate the mechanics.
| Step | Example values (€) |
|---|---|
| Operating cash flow | 250,000 |
| − Capital expenditure (capex) | − 90,000 |
| = Free cash flow | 160,000 |
| Step | Example values (€) |
|---|---|
| Net income | 100,000 |
| + Depreciation | + 60,000 |
| + Additions to provisions | + 10,000 |
| = Gross cash flow | 170,000 |
| − Distribution to shareholders | − 30,000 |
| = Net cash flow | 140,000 |
The two calculations are independent and don’t share the same starting figures — the operating cash flow in the first table is already the result of its own calculation, while net income in the second is the starting point there. In practice, a company would typically derive both views from the same annual accounts; here they are kept separate so each formula can be followed on its own.
A weekly grid with receipts and payments and an automatic low-point warning — the bridge from a cash flow metric to ongoing liquidity control.
Free cash flow vs. operating cash flow vs. liquidity
All three are related but measure different things, and mixing them up is a common source of confusion in financial reporting.
- Operating cash flow shows whether the core business generates cash under its own steam — regardless of investment, financing or distributions.
- Free cash flow deducts the capital expenditure a business needs, showing what remains genuinely available afterward. That makes it the more informative figure when the question is a company’s real financial headroom — for example for a lender assessing debt service capacity.
- Liquidity, by contrast, is a point-in-time measure: the cash actually on hand right now. Neither operating cash flow nor free cash flow says anything about when within a year the money actually moves — a company with solid free cash flow over twelve months can still hit a squeeze in week six, if a large investment and a tax payment land at the same time.
That timing gap is exactly what forward-looking cash flow forecasting closes: instead of looking back at a closed period the way free cash flow does, it projects week by week when money will come in and go out — typically on a rolling 13-week horizon. Free cash flow stays a useful annual yardstick for internal financing capacity; week-by-week control of solvency is the forecast’s job.
Frequently asked questions
The most important questions on free cash flow are gathered at the end of this page.