Glossary
Free cash flow
Definition : Free cash flow
The free cash flow is an indicator that allows to evaluate the economic performance and the evolution of the financing needs of a company.
What is the purpose of Free Cash Flow?
Free cash flow is of great interest in the context of a company's financial management. It allows not only to evaluate the economic performance of a company, but also the future evolution of its financing needs.
It calculates like this: CAF-BFR-Investments net of disposals.
How to maintain and optimize your Free Cash Flow?
That's why we need to be careful with cash flow. But even if cash flow deteriorates, this is not necessarily negative for the company, given the many indicators that make it up.
It's normal for cash flow to be negative in a company's first few years, as its turn to positive corresponds to the payback period. If FCF is negative, this means that outgoing cash flow is greater than incoming cash flow. In this case, you need to play with the different lead times (delivery, invoicing, collection) in order to optimize the sales cycle, and thus ensure that the outgoing cash flow is once again lower than the incoming cash flow.Â
It's normal for cash flow to be negative in a company's first few years, as its turn to positive corresponds to the payback period. If FCF is negative, this means that outgoing cash flow is greater than incoming cash flow. In this case, you need to play with the different lead times (delivery, invoicing, collection) in order to optimize the sales cycle, and thus ensure that the outgoing cash flow is once again lower than the incoming cash flow.Â
If you want to know more about the use of Free Cash-Flow in thevaluation of a company, please contact one of our experts: contact a XVAL consultant.
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