Free cash flow (FCF) is the cash remaining after a company pays to operate and maintain its asset base—the practical measure of whether the business generates real liquidity.

How it works

A simplified view starts with operating cash flow from the business (collections minus operating outflows), then subtracts capital expenditures needed to sustain or grow the asset base. The result is free cash flow. Early-stage startups often show negative FCF while investing in growth; later-stage and public companies are judged on whether FCF turns positive and expands. FCF differs from net income because accounting profit includes non-cash items and ignores timing of cash in and out. A company can report profits while burning cash, or burn accounting losses while generating cash in specific periods.

Why it matters

• Founders: Track cash, not just revenue or EBITDA. Know what drives FCF—margin expansion, working capital, or capex—and when investors will expect a path to positive FCF.
• Investors: Growth investors may tolerate negative FCF with strong unit economics; buyout and late-stage funds often underwrite explicit FCF projections for returns. FCF supports debt capacity and exit multiples tied to cash generation.

Common mistake

Equating revenue growth with healthy cash economics. High growth with heavy capex, refunds, or long payment cycles can produce weak or negative free cash flow even when top-line looks strong.

Related ideas

Operating cash flow, gross burn, gross margin, and path-to-profitability narratives in growth equity diligence.