All you need to know about Free Cash Flow – metrics, methods and mid-market best practices
Cost control and liquidity management are top priorities for UK CFOs. According to CFO Strategies: 2025 UK Deep Dive, 88% of finance leaders are investing in finance technology and 86% plan to enhance cash forecasting accuracy to ensure the business has enough cash on hand.
For mid-market companies, strong free cash flow (FCF) is one of the clearest signals of resilience and growth potential. It’s what analysts, banks, and investors look for when assessing scale-up readiness, funding eligibility, or acquisition appeal. Healthy FCF shows that after running the business and funding essential investments, there’s still cash left to fuel growth, reduce debt, or reward shareholders.
Discover more CFO priorities and forecasting challenges in Agicap's 2025 survey report
What is free cash flow?
FCF is the cash a business generates from its day-to-day operations that remains available after covering the investments needed to maintain or grow the business. These investments can include maintenance CapEx, acquisitions, disposals, intangible asset development, and allocations to cash reserves.
Unlike revenue or profit figures, FCF reflects real liquidity. In other words, it is the cash that can be deployed for:
Funding growth projects
Acquiring competitors
Reducing debt to strengthen the balance sheet
Paying dividends to shareholders
An FCF figure can be:
Positive. Meaning that surplus cash is available after operating and investment costs.
Negative. This indicates that debt levels may rise, unless the shortfall is due to strategic investments such as building working capital or financing a project with a clear return on investment (ROI) horizon.
Over time, FCF provides one of the clearest measures of a company’s capacity to generate cash sustainably. For mid-market firms, tracking and optimising it should represent much more than a pure accounting exercise. Done right, FCF can act as a strategic lever for proving resilience, securing funding, and signalling readiness for the next growth phase.
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Free cash flow example: a growing plumbing business
Imagine you are the finance director of a thriving plumbing company. Income comes from services like repairs, new installations, parts sales, and design advice. Each month, the CFO or treasurer allocates this cash to:
Pay all staff salaries (including their own)
Buy new equipment and materials from suppliers
Replace worn tools and machinery
Maintain premises and company vehicles
What’s left after these costs is free cash flow. That surplus can be channelled into expansion projects, acquisitions, debt repayment, or shareholder dividends – actions that demonstrate financial health and growth potential. Conversely, consistently low or negative FCF may indicate overextension or capital tied up in ways that delay ROI.
Why is free cash flow important?
Purpose | Why it matters | Example impact |
|---|---|---|
Assess financial performance | Shows the actual cash available after operational and capital expenses, giving a true picture of liquidity | Confirms if the business can meet obligations without taking on more debt |
Guide investment decisions | Ensures you have the cash capacity before committing to growth opportunities | Avoids overextension when considering acquisitions or new product launches |
Support stakeholder confidence | Trusted by investors, creditors, and analysts as a reliable measure of financial health | Easier access to financing or favourable credit terms |
Enable strategic actions | Identifies surplus cash that can be deployed to drive growth, reduce debt, or reward shareholders | Paying down loans to lower interest costs, or issuing dividends |
Measure resilience | Indicates the ability to withstand market shocks or downturns without compromising operations | Maintaining stability during a supply chain disruption |
How FCF can be more useful than a balance sheet
As we have explored already, FCF is a direct measure of the cash a business truly generates and can use – making it, in many cases, a more precise indicator of financial health than a balance sheet. And although a balance sheet shows assets, liabilities, and equity at a given point in time, it also includes non-monetary items that can effectively obscure the real liquidity position. Not what any finance leader needs!
Balance sheets record figures such as:
Allowances (e.g., provisions for bad debts)
Depreciation of fixed assets
Changes in inventory values
Other accounting adjustments
Since these are not actual cash movements, they can make it difficult to see how much money the business has generated over a period. And obscurity is never helpful when trying to get a clear and realistic picture on which to make decisions.
Worked example
If a company invests £100,000 in property with a ten-year depreciation schedule (straight-line under IFRS and UK GAAP for simplicity), the balance sheet will reduce book value by only £10,000 each year, even though the cash outflow occurred in full at the time of purchase.
Similarly, when a sale is made, the total value is recorded immediately, regardless of whether the payment has been received or if extended payment terms have been offered to the customer.
These timing differences and accounting treatments mean the balance sheet is often a less reliable gauge of actual cash availability. FCF avoids this distortion by focusing solely on cash generated from operations after necessary investments, providing a concrete view of what’s available to reinvest, distribute, or hold in reserve.
Balance sheet vs. free cash flow
Feature | Balance sheet | Free cash flow (FCF) |
|---|---|---|
Purpose | Snapshot of a company’s financial position at a specific date | Measures cash available after operational and capital expenditure |
Includes non-cash items? | Yes – e.g., depreciation, allowances, inventory changes | No – focuses on actual cash movements |
Timing | Records transactions when they are recognised under accounting rules | Records only when cash is actually received or spent |
Common distortions | Deferred payments, extended credit terms, spread-out depreciation | Minimal – reflects real-time liquidity |
Best used for | Assessing overall asset, liability, and equity structure | Evaluating liquidity, funding capacity, and investment readiness |
How to calculate FCF – and why it differs from EBITDA
EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortisation) became popular in the 1980s during the leveraged buyout boom as a quick way for investment bankers and private equity firms to assess whether a business could service its debt. While it remains a convenient 'shorthand' for operational profitability but it tells only part of the story.
Free cash flow focuses on liquidity rather than accounting profit, making it a more direct measure of the cash actually available to reinvest, repay debt, or distribute to shareholders. For mid-market companies, this distinction is crucial – cash availability can determine whether a growth plan moves forward or stalls.
The most common formula for FCF is:
FCF = Cash Flow from Operating Activities – Capital Expenditures (CapEx)
This version (the most widely used version in published analysis because it is simple and comparable across companies) focuses purely on operational cash inflows and outflows, minus the investments needed to maintain or expand the business’s asset base.
A broader definition (less common but useful for internal planning and group-level cash management) used by some businesses expands this to:
FCF = Cash Flow from Operating Activities – Cash Flow from Investing Activities – Corporate Tax
This approach goes beyond CapEx to include other investment-related outflows (e.g., acquisitions, disposal of assets) and adjusts for tax timing. While less common in published financial analysis, it can be useful for internal planning and group-level cash management.
Alternative approaches
Some finance teams adapt the formula to better align with internal reporting and broader definitions of investing activities, such as:
GOS method: FCF = Gross Operating Surplus – Tax on Profits – Change in Working Capital Requirement (WCR) + Disposals of Fixed Assets – Investments
Positive-bias method: Including only recurring maintenance investments, which often makes FCF appear consistently healthy
Different businesses typically adapt these methods to suit their objectives. For example, a self-financing capacity approach strips out financing costs to focus purely on operational cash surplus. Meanwhile, group-level assessments may exclude intra-group receivables and payables from WCR calculations. Others calculate a “positive-bias” FCF by including only recurring maintenance investments, making FCF appear consistently healthy.
Whichever method is applied, banks and stakeholders naturally expect rigour and transparency. If your calculation departs significantly from the standard approach, it is important to explain why – and make it easy for others to reconcile your figures with more widely recognised methods.
Comparison of EBITDA to FCF
Feature | EBITDA | Free cash flow (FCF) |
|---|---|---|
Purpose | Measures operational profitability before non-cash charges | Measures cash actually available after required investments (CapEx or broader investing activities) and taxes |
Includes capital expenditure | No | Yes – standard method deducts only CapEx; broader method may deduct all investing activities |
Definition flexibility | EBITDA is standardised across companies | FCF can vary depending on whether only CapEx or all investing activities are deducted |
Includes taxes | No | Yes – in most calculations, tax outflows are included |
Includes working capital changes | No | Yes |
Reflects liquidity | Partially | Fully |
Common use | Debt capacity assessment, valuation multiples | Funding decisions, dividend policy, investment readiness |
Different types of free cash flow – FCFF vs FCFE
There are two principal concepts stemming from FCF that are aimed at different audiences. Free Cash Flow to the Firm (FCFF) is for investors and FCF to Equity (FCFE) is for shareholders. Here we’ll examine both.
Free cash flow to the firm (FCFF) represents the amount of cash available to all investors – both equity holders and debt holders. It is calculated before the impact of the company’s financing structure, making it a useful metric for valuing a business independently of how it is funded. In practice, the interest expense is added back to free cash flow after tax because it forms part of the returns available to debt providers.
Two common methods for calculating FCFF are:
Cash flows from operations + (Interest × (1 – tax rate)) – Capital investments
Net profit + Depreciation + Other non-monetary charges + (Interest × (1 – tax rate)) – Capital investments – Investments in working capital
Free cash flow to equity (FCFE) focuses solely on the cash available to equity shareholders. It is calculated after accounting for all expenses, taxes, debt repayments (both principal and interest), and investments required to maintain or grow the business. FCFE is therefore net of tax and reflects the actual cash that could be distributed as dividends or retained to fund future growth.
In summary, the two concepts are used as follows in the real world:
FCFF is particularly relevant for investors, analysts, and acquirers who want to compare companies with different capital structures on a like-for-like basis.
FCFE is more relevant for shareholders assessing the business’s capacity to pay dividends or reinvest in equity-driven growth.
Best practices to optimise free cash flow
Optimising FCF is not a one-off exercise, it is an ongoing discipline that blends visibility, process efficiency, and strategic planning. While each firm will have its own approach, Agicap has seen the following best practices among its customers – and can help finance leaders strengthen liquidity and reduce risk.
1. Centralise and consolidate real-time cash data. Fragmented accounts, entities, and currencies make it hard to know your true liquidity position. A single, up-to-date source of truth eliminates blind spots and ensures decisions are made on the latest figures.
2. Implement accurate and dynamic forecasting
Static forecasts can go stale in days. Rolling, driver-based forecasts updated weekly or bi-weekly help you anticipate changes before they hit your cash position – and when paired with regular variance analysis, they allow you to identify the cause of deviations and take corrective action in time to stay on track.
3. Prioritise automated transaction categorisation
Manual categorisation drains time and lets spend leakage go unnoticed. Automation speeds up reconciliation, flags anomalies, and surfaces trends you can act on quickly.
4. Leverage scenario planning and what-if analysis
Running simulations for delays, cost shocks, or investment opportunities lets you prepare countermeasures in advance.
5. Drive accountability with reporting and alerts
Visibility is useless if only the CFO sees it. Share customised reports with managers and set automated alerts for threshold breaches to encourage shared ownership of cash performance.
6. Integrate seamlessly with ERP, banking, and business tools
Disconnected systems mean missed data and slower closes. Integration ensures your FCF view is always complete and current.
The growing importance of FCF analytics
For every finance leader, the ability to analyse FCF is central to strategic decision-making. It provides visibility into whether the business is likely to generate or consume cash in the months ahead, informing everything from debt repayment plans to investment timing. Within a group structure, consolidated FCF forecasts can reveal which subsidiaries are cash generators and which may require additional support or even divestment.
While this sound great on paper, many mid-market businesses struggle to achieve this level of insight because of common operational obstacles such as:
Fragmented or outdated financial data across multiple entities and bank accounts
Slow, manual workflows that rely heavily on spreadsheets – increasing the risk of error
Disconnected systems that make it difficult to integrate bank feeds, ERP platforms, or accounting software
Limited ability to produce custom reports or set alerts for critical variances
Where Agicap adds value
Agicap’s platform – trusted by over 8,000 mid-market companies – addresses these pain points by giving finance teams a single, connected environment in which to monitor and optimise free cash flow. Instead of relying on scattered spreadsheets and disconnected banking portals, all cash data is centralised and updated in real time, creating a single source of truth for decision-making.
Centralised, real-time cash data. Consolidates information from all bank accounts, entities, and currencies into one view.
Automated transaction categorisation. Speeds up reconciliation and flags unusual patterns early.
Dynamic forecasting and scenario planning. Models the impact of delayed payments, cost changes, or major investments.
Customisable reporting and alerts. Ensures stakeholders receive timely, relevant insights.
Seamless integration. Connects with ERP, accounting, and banking systems to eliminate silos and improve data accuracy.
By automating data collection, Agicap allows finance teams to spend less time on manual processes and more time on analysis. The result is faster, more informed decision-making – and a stronger foundation for improving free cash flow.
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Real-world example: Ecophyse
A great example of Agicap’s impact on free cash flow comes from Ecophyse, a waste recovery firm headquartered in France with more than US $32 million in annual revenue. Like many growing companies, Ecophyse needed better visibility over its cash position across multiple bank accounts to identify surplus liquidity that could be deployed more strategically.
The company implemented Agicap as part of a wider centralisation project aimed at solving these visibility challenges and identifying peaks and troughs in cash flow more effectively. By consolidating all bank accounts into one dashboard and using Agicap’s data-driven capabilities, Ecophyse was able to:
Pinpoint excess cash that could be invested in growth initiatives
Monitor free cash flow across the organisation in real time
Improve forecasting accuracy, enabling faster and more confident decision-making
Patrick Doucet, General Manager at Ecophyse, comments: "We previously managed our cash flow by connecting to different portals of our banks and then centralised and consolidated everything through an Excel file manually. Thanks to Agicap we are now able to centralise and unify the flows automatically and thus arrive at a truly centralised management and arbitration of our cash flow."
In short, by centralising its cash management and adopting scenario-based forecasting, Ecophyse moved from a reactive cash management approach to proactive free cash flow optimisation – strengthening its growth strategy while reducing risk.
Read the full Ecophyse case study for more details and benefits
The bottom line
In summary, free cash flow is one of the clearest indicators of a business’s underlying health. Tracked over time, it can be an early signal of ROI, a predictor of scale-up readiness, and a measure of resilience when market conditions change. Interpreted correctly, FCF enables investors and decision-makers to make informed, confident projections about a company’s growth trajectory.
For mid-market companies, a strong FCF position can unlock funding, support expansion, or simply prove the organisation can withstand economic shocks – from volatile input costs to new trade tariffs (something high on the agenda in 2025 and beyond). The challenge for finance leaders lies in tracking it accurately, analysing it effectively, and acting on the insights in time to truly make a difference to the business.
Agicap gives finance teams the visibility, automation, forecasting power, and real-time data, to do exactly that, transforming FCF from a static number into a tool for strategic decision-making and sustainable growth.
You should be tracking and optimising FCF. And with Agicap, you can do both.
See for yourself with a free Agicap demo
Frequently asked questions (FAQs)
Why is free cash flow important?
FCF shows whether a company can generate surplus cash beyond what it needs for its core operations and investments. A healthy FCF position signals to investors and lenders that the business has the capacity to grow, repay debt, and withstand market shocks.
Is free cash flow the same as net profit?
No – net profit is an accounting measure that includes non-cash items such as depreciation and allowances. FCF focuses purely on actual cash movement, making it a more reliable measure of liquidity.
How can I forecast free cash flow accurately?
Accurate FCF forecasting relies on up-to-date, consolidated cash data and realistic assumptions about revenue, expenses, and capital investment. Rolling forecasts, scenario modelling, and regular variance analysis can improve accuracy.
What is free cash flow conversion?
Free cash flow conversion measures how effectively a company turns its earnings into free cash flow. It is typically calculated as FCF ÷ Net Income, expressed as a percentage. A higher conversion rate suggests strong cash generation relative to accounting profit.
What is free cash flow margin?
Free cash flow margin shows how much free cash flow a company generates for every pound of revenue. It is calculated as FCF ÷ Revenue × 100. This metric is useful for comparing cash generation efficiency between companies or across time periods.
What is free cash flow per share?
Free cash flow per share divides total free cash flow by the number of outstanding shares. This figure can help investors evaluate the company’s capacity to return cash to shareholders via dividends or share buybacks.
Why can free cash flow be negative?
Negative FCF can occur when a company invests heavily in growth, such as expanding capacity, acquiring new assets, or building working capital. Some high-growth firms deliberately accept negative FCF for a defined period as part of their scale-up model, hoping that the upfront investment will drive outsized returns later. While this is not necessarily a sign of trouble, persistent negative FCF without a clear return on investment can indicate financial strain.
Where can you find free cash flow on financial statements?
Free cash flow is not a standard line item in financial statements, so you won’t find it explicitly listed. Instead, you can calculate it using figures from the cash flow statement – specifically, by taking cash flow from operating activities and subtracting capital expenditures (CapEx), which are usually listed in the investing activities section. Some analysts also refer to figures in the income statement (net income) and balance sheet (changes in working capital) to refine their calculation. Under the broader approach, you would also account for all cash flows in the investing activities section – not just CapEx – to capture acquisitions, disposals, and intangible investments.
How can Agicap help improve my free cash flow management?
Agicap centralises cash data from all bank accounts and entities into a single, real-time dashboard. It automates transaction categorisation, supports dynamic forecasting and scenario planning, integrates with ERP and accounting systems, and provides custom reports and alerts – enabling finance teams to optimise FCF with confidence.
