What is the difference between cash flow and free cash flow?

Definition of Cash Flow

Cash flow refers to the amounts of cash that a company, investment or project generates. The cash that a company generates is different from the company's net income (which is measured using the company's revenues and expenses under the accrual basis of accounting).

A company's significant cash flows are reported in the statement of cash flows, which is organized as follows:

  • Cash flows from operating activities
  • Cash flows from investing activities
  • Cash flows from financing activities
  • Supplemental disclosures of significant noncash changes in the above sections

Definition of Free Cash Flow

Free cash flow is a metric often used by financial analysts. It is calculated by using two amounts reported on a company's statement of cash flows:

  • Total/Net amount of cash flows from operating activities, minus
  • Capital expenditures (which is a separate item reported under cash flows from investing activities)

Example of Free Cash Flow

Assume that during the most recent year a corporation had cash flows from operating activities of $300,000 and had capital expenditures of $225,000. The corporation's free cash flow was $75,000.

Occasionally, dividends paid to stockholders during the recent year are also deducted in calculating free cash flow.

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