Free Cash Flow

Definition

Free cash flow (FCF) is the cash left over after your business covers its operating expenses and capital expenditures (equipment, software, infrastructure). It's the money that's truly “free” — available for owner distributions, debt paydown, hiring, or saving for a rainy day.

Think of it this way: profit tells you what you earned on paper. Free cash flow tells you what actually landed in the bank that you can use.

Why It Matters

A business can be profitable and still run out of cash. This happens when profits are tied up in accounts receivable, inventory, or equipment purchases. Free cash flow strips away the accounting abstractions and answers the only question that matters: how much usable cash did we generate?

For small and mid-size businesses, FCF is the best measure of financial flexibility. Positive FCF means you have options — you can invest in growth, build a cash reserve, or take money off the table. Negative FCF means you're burning through reserves or taking on debt, even if the P&L shows a profit.

Example: A construction company earns $3M in revenue and reports $400K in profit. But they spent $350K on new equipment and their receivables grew by $200K. Their free cash flow is actually negative — they generated less cash than they spent, despite being “profitable.”

How to Calculate It

Free Cash Flow = Operating Cash Flow - Capital Expenditures

Operating cash flow starts with net income and adjusts for non-cash items (depreciation, changes in working capital). Capital expenditures are purchases of long-term assets like equipment or property.

How CentSight Helps

CentSight calculates your free cash flow by categorizing transactions from your connected accounts into operating expenses and capital expenditures automatically. You get a running FCF number that updates daily, not one you calculate manually at quarter-end. Ask “What's our free cash flow this month?” and CentSight shows you the answer with a breakdown of what's driving it.