Plain definition
In this management series, simplified free cash flow is operating cash flow minus cash paid for capital expenditure in the same period.
Simplified free cash flow = operating cash flow − cash paid for capital expenditure
This is not a universal definition of free cash flow. It is different from valuation measures such as FCFF and FCFE.
Worked example
Monetary examples use Saudi riyals (SAR). The same principles apply in other currencies.
A company generates of operating cash flow.
It pays in cash for long-term operating assets during the same period.
| Operating cash flow | |
|---|---|
| Cash paid for capital expenditure | |
| Simplified free cash flow |
is not the closing cash balance.
It is also not automatically available for dividends, debt repayment, or acquisitions.
Why it matters
The company may still need the cash.
Minimum reserves, debt service, covenants, working-capital volatility, and existing commitments affect what can be used.
Negative simplified free cash flow is not automatically failure.
It may reflect productive investment—but the investment still needs a clear funding source.
Practical consequence
State the formula whenever the measure is reported.
Reconcile operating cash flow to the statement of cash flows.
Use cash paid for capital expenditure in the same period.
Do not substitute depreciation, unpaid purchase orders, or non-cash acquisitions. Keep this measure separate from FCFF and FCFE.