What is free cash flow?

Free cash flow is the cash a company has left over after paying its running costs and buying whatever equipment and property it needs to keep operating. It is what remains available to pay down debt, buy back shares or hand out dividends. Profit and free cash flow are different numbers, and a company can report a healthy profit while its free cash flow is negative.

Start with the cash a business actually collected from customers and subtract the cash it paid out to run the place, which gives operating cash flow. Then subtract what it spent on physical things it needs to stay in business, like machines, vehicles or buildings, and what is left is free cash flow. That is the money genuinely available for anything else, and lenders watch it more closely than profit. Why not just look at profit, the headline number every company reports? Because profit follows accounting rules that spread costs across years and count sales before the money arrives. A firm can therefore book a profitable year while cash is leaving the building. It runs the other way too, and a company can look unprofitable while generating plenty of cash. One catch is worth knowing: this figure can be flattered for a year or two by delaying repairs and new equipment, which is why a steady record matters far more than one strong year.

Your salary is not money you can do as you please with. Rent, food and travel come out first, and then the boiler needs replacing and the car needs new tyres. Whatever survives all that is the amount you could actually save or spend on something you wanted, and it is usually far smaller than your salary. Free cash flow is a company's version of that number, and skipping the boiler for a year makes it look better than it is.