Free Cash Flow — Microsoft Excel
In this article, we will walk you through the fantastic journey of learning free cash flow in finance using excel. As we understand the free cash flow in a simple manner, than we can say that, free cash flow (FCF) represents the cash a company generates after accounting for cash outflows to support operations and maintain its capital assets.
Free Cash Flow
Free Cash Flow (FCF) represents the cash a company generates after accounting for cash outflows to support operations and maintain its capital assets. The free cash
flow is a measure of profitability that excludes non cash expenses like depreciation and spending on equipment and assets, and changes in working capital from the balance sheet. Free cash flow is an important assessment as it shows how efficient a company is at generating cash. Investors use free cash flow to measure whether a company might have enough cash to pay dividends or pay for share buybacks. In addition, the
more free cash flow a company has, the better its position to repay debt and reinvest, making it an attractive choice for investors.
The cash a firm generates after deducting cash outflows for operating expenses and capital asset maintenance is known as Free Cash Flow (FCF). It is a metric of profitability that takes out of the balance sheet non cash expenditures, including
depreciation, spending on assets and equipment and adjustments to working capital.
Free cash flow analysis is crucial because it reveals how well a business generates cash. Using free cash flow, investors can determine whether a company has enough
money to repurchase shares or pay dividends. Additionally, A business becomes more appealing as it strengthens its ability to pay off debt and reinvest the additional
free cash flow it generates.
There are three methods to calculate FCF:
Using operating cash flowFCF = Operating Cash Flow – Capital Expenditure.
Using Sales Revenue
FCF = Sales Revenue – Operating Cost + Taxes – investment needed in operating capital.
Using Operating Profit
FCF = Total Operating Profit with Taxes – total investment in operating capital.
As we can see in Figure 5.19, FCF is 12,50,000/-, which means it is positive and capital expenditure is less than the operating income, so the company has enough money to pay for expansion or other required operations.
PMT Formula and Data Table in Excel
We are calculating the EMI to be paid at a certain interest rate for a certain period. The formula is shown in the figure below.
We must pay 4866.33 every month for EMI and the total amount will be 291980.08 over a period of 5 years @ 8% per annum cost, as shown in the figure below.
Now, we want to know the PMT if we will pay it in various years and at different
rates. Excel has an option that allows us to can check the PMTs at different rates and for different periods. Let’s take the same example.
- First, we need to mention different rates in columns and different time in rows, as shown in figure below.
We put interest rate 5% to 10% with ½ % of increment, and 2 to 10 years with 1-year increment. And assign Top Row and link PMT cell value B7 with G1, G1 = B7.
2. Select all cells from G1 :P12.
3. Select what if analysis – Data Table.
As we can see in the above figure, Data Table Dialog Box will appear.
4. Select the row input cell and column input cell.
As we can see in the above figure, we put Row Input Cell with years Cell B3 and Column Input Cell with cell B4 where interest rate is mentioned. Click on OK.
5. We will get the desired result.
The above figure shows, the EMIs calculation with various periods and various rates.
Conclusion
Finally, we will understanding the fundamental concept of free cash flow in finance and along with that we also understanding how to use free cash flows, why we use and how important it is for any company, we use this as an extra income for doing and handle other company operations that is related to cash.
