Free cash flow is a cash-flow measure after reinvestment in the business. A common calculation is operating cash flow less capital expenditure. State the formula you are using: the name alone does not establish which payments have been deducted.
The common operating-cash calculation
Free cash flow = Operating Cash Flow − capital expenditure.
This measure can still leave debt principal and other required payments to fund. It is not automatically available for discretionary spending. The SEC specifically distinguishes this commonly used calculation from cash available after all mandatory outflows. SEC explanation, Question 102.07.
In a hypothetical year, $500,000 operating cash flow less $150,000 equipment spending gives $350,000 free cash flow on this basis. If $100,000 of loan principal is also due, that payment still needs to be funded. Beginning cash, other commitments and the required reserve also affect any distribution decision.
Capital expenditure
Capital expenditure (CapEx) is spending to acquire or improve assets that serve the business beyond the current period, such as equipment. The supported accounting policy determines what is recorded as an asset rather than a current expense.
The cash-flow calculation uses the cash paid for those purchases during the stated period. An asset acquired directly through financing requires separate noncash treatment; it is not automatically a cash outflow of the same amount. Depreciation recognizes the relevant cost over time, while the payment schedule explains when cash leaves. Keep the asset addition, depreciation and payment distinct in the model.
Free cash flow to the firm
Free cash flow to the firm (FCFF) measures operating cash after the relevant taxes and reinvestment, before payments to lenders and owners. In a discounted-cash-flow valuation of operations, it is paired with WACC.
Free cash flow to equity
Free cash flow to equity (FCFE) includes the effects of debt funding and repayment after operating needs and reinvestment. In an equity valuation, it is paired with the return required by equity owners. New borrowing can increase FCFE without improving operating performance. These two valuation bases must not be mixed. NYU Stern explanation of cash flows and discount rates.
Connect the measure to the decision
Use the definition actually supported by the Three-Statement Model and identify currency, period, tax basis and included accounts. Missing support is an open assumption, not a zero.
For an owner payment, use the distributable-cash analysis to test the amount and timing against obligations and the cash reserve. For personal goals, the Scorecard includes compensation, distributions and other personal income; that total is not the company’s free cash flow.
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