Definition
Free cash flow is cash generated by operations minus capital expenditures. FCF is a key measure of financial sustainability.
Formula
Free cash flow = operating cash flow - capital expenditures
Example
If operating cash flow is $1.2M and capex is $300k, free cash flow is $900k.
How to use it
- Use FCF to compare how efficiently revenue turns into cash.
- Negative FCF is common during growth, but trend and drivers should be clear.
- Separate maintenance capex from growth capex when evaluating durability.
Common mistakes
- Treating EBITDA as a proxy for FCF without adjusting for working capital.
- Ignoring seasonality in collections that swings operating cash flow.
Why this matters
This term matters because cash timing and risk are usually the difference between a plan that works on paper and a plan that survives. Use consistent definitions so decisions are comparable over time.
Practical checklist
- Write a 1-line definition for "Free Cash Flow (FCF)" that your team will use consistently.
- Keep the time window consistent (weekly/monthly/quarterly) when comparing trends.
- Segment results (channel/plan/cohort) before drawing big conclusions from blended averages.
- Sanity-check with a related calculator from the same category on MetricKit.
- Read the related guide (e.g., Valuation modeling hub: WACC, DCF, multiples, and equity value) for context and common pitfalls.
Where to use this on MetricKit
Calculators
- Pro Rata Investment Calculator: Estimate how much you need to invest in a new round to maintain your ownership percentage (simplified).
- Option Pool Shuffle Calculator: Estimate founder dilution impact when the option pool is increased to a target percent of post-money (simplified).
- SAFE Conversion Calculator: Estimate how a SAFE converts in a priced round using a valuation cap and/or discount (simplified).
- Convertible Note Conversion Calculator: Estimate how a convertible note converts in a priced round with interest plus a valuation cap and/or discount (simplified).
- Liquidation Preference Calculator (1x): Estimate investor proceeds at exit under a simple 1x non-participating liquidation preference vs converting to common (simplified).
Guides
- Valuation modeling hub: WACC, DCF, multiples, and equity value: A practical hub for valuation modeling: estimate a discount rate (WACC), run a simple DCF with sensitivity analysis, and translate enterprise value to equity value.