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What is Free Cash Flow (FCF)?

Free cash flow (FCF) is an important indicator that reflects the ability to generate cash after paying the necessary expenses for business operations. Understanding what free cash flow is will help businesses be flexible in paying debt, investing, and paying dividends. 

Let's learn about the role and effective management of free cash flow in a business through this article by Bizzi.

Dòng tiền tự do là gì?

Free cash flow (FCF) is the amount of cash remaining after a business has paid all the costs necessary to maintain its operations, including operating expenses (OpEx) and capital expenditures (CapEx). FCF not only reflects profitability but also assesses the ability to generate sustainable profits and maintain stable financial operations over the long term.

Dòng tiền tự do là gì?

Tìm hiểu đặc điểm của dòng tiền tự do

If FCF is positive, the business has enough money to expand, pay dividends, or reduce debt. Conversely, the business is spending more money than it generates, possibly due to heavy investment in assets or financial difficulties.

Businesses can use FCF for a variety of purposes, such as paying down debt, investing in growth, paying dividends, or buying back shares.

FCF is not a measure that appears directly in financial statements under GAAP or IFRS, but can be calculated from figures in the cash flow statement and income statement.

Unlike net income and EBITDA, FCF is not affected by accounting factors such as depreciation, provisions or other accounting adjustments.

If a company changes its investment strategy or experiences fluctuations in its working capital management, FCF may change. For example, during an expansion phase, FCF may decrease as the company invests heavily in assets (increased CapEx). Conversely, during a stabilization phase, FCF may increase as capital expenditures decrease.

Investors use FCF to assess a company's intrinsic value, as it shows the company's ability to generate cash, unaffected by accounting principles. In other words, FCF reflects the company's actual ability to generate cash.

Vai trò và ý nghĩa của dòng tiền tự do

For business

Dòng tiền tự do – FCF giúp doanh nghiệp xác định khả năng duy trì hoạt động mà không cần vay nợ hoặc huy động vốn bên ngoài hay nói cách khác là khả năng tạo ra tiền mặt sau khi chi trả các khoản đầu tư cần thiết để duy trì và phát triển. Nếu FCF dương và ổn định chứng tỏ doanh nghiệp có khả năng sinh lời bền vững. Ngược lại, FCF âm kéo dài có thể là dấu hiệu của quản lý tài chính kém hoặc đầu tư không hiệu quả.

FCF allows a company to pay dividends or reduce debt without affecting its core business. Businesses with good FCF are able to repay debt on time, reducing financial pressure. When it needs to expand, businesses can borrow capital at better interest rates, because banks and credit institutions often evaluate FCF to consider debt repayment ability.

Used to reinvest in development projects, acquire other companies or expand without borrowing too much. High FCF allows businesses to upgrade infrastructure, recruit good staff, invest in research & development (R&D) to maintain competitive advantage.

Help companies make strategic financial decisions such as maintaining appropriate debt levels, optimizing equity, or implementing sustainable growth strategies.

Giúp công ty tự chủ và giảm thiểu rủi ro tài chính từ các khoản vay hoặc các yếu tố bên ngoài khác. FCF giúp doanh nghiệp lên kế hoạch tài chính dài hạn, kiểm soát dòng tiền vào – ra và quản lý chi phí vốn (CapEx) hiệu quả.

If FCF is negative for a long period of time, businesses need to consider cutting unnecessary spending or optimizing cash flow from operations.

If a company has excess FCF, it can pay higher dividends or buy back shares, increasing shareholder value. A company with a stable dividend policy based on FCF is often attractive to long-term investors.

For investors

FCF là chỉ số quan trọng trong mô hình chiết khấu dòng tiền (Discounted Cash Flow – DCF) để xác định giá trị doanh nghiệp. Giá trị doanh nghiệp (EV) được xác định dựa trên khả năng tạo FCF trong tương lai.

Free cash flow assesses the potential and financial situation, showing the ability to generate cash flow from production and business activities. Investors can take advantage of buying stocks at low prices when FCF increases steadily, thereby opening up investment opportunities.

Businesses with strong free cash flow are less dependent on debt, thereby reducing financial risk. If negative FCF persists, investors need to consider the cause: Is it expansion investment or ineffective business operations?

Stocks of companies with high and sustainable FCF are often of interest to long-term investment funds. Conversely, if a company has negative FCF but is investing in potential projects, investors may consider investing for the long term.

Công thức tính dòng tiền tự do

The discounted free cash flow (DCF) method helps determine the intrinsic value of a business based on its future cash generation potential. Investors and businesses can use DCF to make informed investment decisions.

In there:

For example, if a company has cash flow from operations of $10 million, and capital expenditures (CapEx) of $3 million, then FCF = $7 million.

In there:

Các bước chiết khấu dòng tiền tự do

Formula: WACC = Rd × Fd × (1 – t) + Re × Fe.

In there:

Lưu ý về dòng tiền tự do

Các bước quản lý tài chính hiệu quả với Bizzi

Use cash flow management tools modern helps businesses solve cost and budget problems effectively. Bizzi Expense is one of the leading business financial management tools today, providing an automated solution for the business's expense reporting process, easy to track and Cash flow management smartly without spending much time and effort.

Outstanding features of Bizzi Expense:

Lợi ích của việc sử dụng Bizzi Expense – Công cụ quản lý dòng tiền tự do đắc lực dành cho doanh nghiệp

Automate cost management processes, optimize cash flow:

Improve free cash flow (FCF) through tight expense control:

Flexible integration with accounting and ERP systems

Support smart financial decision making

Understanding what free cash flow is and the role of free cash flow in a business is an important key for businesses to expand their business, optimize their finances and reduce debt risks. Bizzi Expense is a powerful support tool that helps businesses manage and optimize free cash flow (FCF), ensuring strong finances for sustainable development.

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