Question

You are hired as the consultant and accountant for a small, but modestly successful manufacturing company. You are advising the owner to work on improving FCF, but he doesn’t understand what it is. How would you explain FCF to this business owner? Why is it important? How is it calculated and what can he do to improve his FCF?

Answer 1

Answer:

The Free Cash Flow (FCF) is the cash the company generates after its expenses and capital expenditures have been deducted.

Explanation:

The Free Cash Flow is important because it helps to analyze the performance of the company as it allows to determine the organization's ability to pay debt and dividends.

The formula to calculate Free Cash Flow is:

FCF= Net income + amortization + depreciation + deferred taxes – capital expenditures – dividends

To improve the FCF, a company could increase the sells, raise the price, decrease the costs, lower tax rates, reduce the working capital, get better terms from suppliers, improve the inventory (maintain an optimal level of inventory).