Discussion:"Free Cash Flow" Calculation
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Discussion Forum Index --> Accounting Questions --> "Free Cash Flow" Calculation
| 1 February 2007 | |
| A few of my clients that care about reading their financial statements have stated that the Balance Sheet, Income Statement, & Cash Flow statements are fine. But what they are really most interested in is the Cash Flow of their business. They say the Cash Flow statement is full of a bunch of accounting jargon, and the subtotals (Operating, Investing & Financing) don't really make "management" sense. And I kinda agree with them on this.
I think what they are looking for is a statement that shows them their "Free Cash Flow", which is the cash flow from operations less capital asset purchases less preferred dividends. However, one thing that confuses me about the Free Cash Flow Calculation is that Interest Expense is included in the cash flow from operations, thus reducing Free Cash Flow. But Principal does not. I thinking I am going to add back the interest expense to the Free Cash Flow, since the debt level of a business is just a function of how a company is capitalized. Thus creating my own modified version of Free Cash Flow. I don't know if what I am saying here is really appropriate for this discussion board, but I thought I would post it anyway to see if anybody has any comments. Here is what Wikipedia has to say about Free Cash Flow: http://en.wikipedia.org/wiki/Free_cash_flow | |
| February 2, 2007 | |
| Interesting. Thanks for putting in the link. I had never heard of the term "free cash flow" before. I would agree that interest expense should be included in the free cash flow calculation and that principal should not. I can understand the argument for taking the interest paid out of the calculation, however, because it is usually reported under other expenses.
I would say that if management will understand the statement better if you make the modification you referred to, then by all means do it that way. Make it a separate supplemental schedule that you add to the statements. You might also want to provide some disclosures that the calculation has been modified from the customary calc. You might also want to consider doing a direct cash flow statement rather than indirect. Sometimes people understand that format better. | |
