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How to calculate Free Cash Flow and Net Cash Flow
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Before we move on, to the next stage stage
of this course, I want to just call out
0:01
some important vocabulary and concepts
related to the cash flow statement.
0:06
We talked about the three sections
operating, investing, and financing.
0:11
Operating shows the cash inflows and
0:16
outflows related to the day-to-day
operations of your business.
0:18
Investing shows the cash inflows and
outflows related to your
0:22
business investment activity, this could
be related to purchases of assets for
0:25
future operational benefit or more
typical investing types of activities.
0:29
Then there's the financing section,
this shows the cash inflows and
0:35
outflows related to debt and
equity funding sources of your business.
0:40
Let's go a step further and talk about
what is known as free cash flow.
0:45
Free cash flow, abbreviated FCF,
0:52
is the sum total of your operating and
investing cash flows.
0:54
So here, we're looking at Facebook's
2017 cash flow statement.
0:59
If we scroll down, we can see that
1:03
they had $24.216 billion in cash
flow from operating activities.
1:08
If we add that plus their $20.038
billion investing cash outflows,
1:15
we get $4.178 billion in free cash flow.
1:21
So why is it called free cash flow?
1:28
It's certainly not free, as it comes as
a result of a lot of hard work, time,
1:30
and money invested and spent, right?
1:35
Well, what this means and
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why it's a number that is often
looked at by stakeholders is because
1:40
this is the cash flow that the business
generated before taking into account
1:44
any impact from the organization or
business' capital structure.
1:49
In other words, free cash flow is
the money the business generated or lost
1:54
before paying back debt, or dividending
out money, or taking on more debt.
1:59
This starts to touch on some more
advanced subject matter beyond the scope
2:05
of this course.
2:09
But I want to make sure you are aware
of the concept of free cash flow.
2:10
I'm gonna be brief here but your sources
of funding are gonna come with costs,
2:16
equity holders want a certain
rate of return, and
2:20
maybe they're relying on
dividends as part of that.
2:23
Debt holders are gonna
demand a return as well.
2:27
And will want to have their debt be
paid by a certain point in time.
2:30
These stakeholders will almost always
scrutinize the companies free cash flow
2:34
before making any funding decisions.
2:38
Because it is one signal and
an important one for
2:40
a company's ability to pay for funding.
2:44
Let's move on to discuss net cash flow.
2:48
This is the summation of all of your cash
inflows and outflows for the period.
2:51
It's your free cash flow plus your
financing cash flows for the period.
2:57
If you have a positive net cash flow,
3:02
then you can increase your
cash balance over the period.
3:04
If you have a negative net cash flow,
then your cash balance decreases.
3:07
Often times, people think that when
they generate a profit, that means their
3:11
business has made money, and their
bank account balances are increasing.
3:16
But, as I hope you're starting to
understand a little better after going
3:20
through the cash flow statement,
generating a profit or net income on
3:24
the P&L doesn't always mean you generated
cash over a period of time as a business.
3:28
Net cash flow is one of the most important
metrics on a financial statement.
3:35
For the vast majority of startups
out here, net cash flow is
3:40
going to be negative, and this number is
your burn rate for that period of time.
3:44
Okay, we've talked about the three
major financial statements.
3:50
In the next stage of this course,
3:54
we'll bring everything
together that we've learned.
3:56
Before that, I do want to note that there
are some other financial statements we
3:58
haven't covered in this course, for
example, stock holders' equity statements.
4:02
As this is a basics course,
4:08
we limited the scope to
the statements most often discussed.
4:09
That's just a heads up for you in case
you've come across these other statements
4:13
while conducting your own analysis.
4:16
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