How to Calculate a Free Cash Flow Forecast

Operating cash flow less cost of assets plus increased or decreased asset finance defines free cash flow. The true forecast for the net cash position.

Operating and Free Cash Flow

A key Figurewizard forecast is that for operating cash flow, describing as it does cash flow generated by a business solely through its core trading or operating activity.

That does not however tell the whole story as cash expenditure arising from you forecast investment in fixed assets is not included in the calculation. Operating cash flow less (the cost of new fixed assets minus the increase / decrease from the previous year of asset finance) will return a “free cash flow” forecast.

How to Calculate Free Cash Flow

For example, starting with the Figurewizard sample forecast for operating cash flow, this is how a free cash flow forecast over three years is calculated.

  Year 1 Year 2 Year 3
Operating Cash Flow 12,208 97,458 227.820
less: Fixed Assets Acquired @ Cost 55.000 15,000 50,000
add: Increase / Decrease in Asset Financing 32,915 -11,638 9.762
Forecast Free Cash Flow -9,877 70,821 187,582

Free Cash Flow Deficits

Unlike most measures of cash flow a free cash flow (FCF) forecast indicating a deficit as in year 1 on the example is not always bad news. Every successful business will be expected to need to invest for growth.

The trick is to measure fixed asset purchases. Persistent free cash flow deficits over the course of a few years, especially if accompanied by pressures on forecasts for monthly bank and cash flows. Fixed assets will always represent a charge against liquidity and cash, however it is being calculated.

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