Accounting Glossary

What Is Free Cash Flow?


Free Cash Flow (Definition)


Free cash flow shows if a business is making enough money to maintain or grow itself, while still generating a profit.

Free cash flow is a fairly technical accounting concept that is used mostly by lenders and investors. It’s a way of telling whether a business can afford to grow, or at least maintain its existing performance, while still generating good profits.

Why Free Cash Flow Matters

A business that can’t continue to generate profit while also paying for required improvements will be seen as a risk. It’s more likely to shrink than to grow. As such, investors will probably avoid it. Lenders will be reluctant to issue new debt to the business for fear they may not get repaid.


What Does Free Cash Flow Mean For The Business Owner?

Business owners can use free cash flow to decide if their growth plans are viable. If the business can’t generate enough cash to finance planned upgrades and bank a profit, then the owner may need to spend more time setting priorities. They will need to decide which upgrades are most important and defer the others.

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