Free Cash Flow to Firm formula
\[ \text{EBIT} - \text{Income tax} - \Delta\,\text{Non-current assets} - \Delta\,\text{Trade Working Capital} \]
Built from the ledger by the indirect method. The change in net non-current assets already equals investment minus depreciation, so depreciation does not appear separately.
Terms
- EBIT, period total: Earnings before interest and taxes: operating profit plus other income and expenses such as investment income and currency results. It is the profit available to pay lenders, the state and owners.
- Trade Working Capital, change over the period: The capital tied up in the operating cycle: what customers owe plus inventory, minus what is owed to suppliers. Its change over a period is the working-capital line in free cash flow.
- Income tax, period total: Tax on the period’s profit, current and deferred.
- Non-current assets, change over the period: Assets held for more than a year: intangible, tangible and long-term financial assets, net of accumulated depreciation.
Result
Free Cash Flow to Firm is an amount in currency. Higher is better.
Target
There is no general target; compare with the company’s own history and with peers in the same industry.
Free Cash Flow to Firm pitfalls
- Revaluations, impairments and disposals also change non-current assets without moving cash. In a period with any of these, adjust or read the result as an estimate.
- Tax here is the period’s tax expense, not tax on EBIT alone, so the interest tax shield sits in FCFF rather than in the cost of debt.
Free Cash Flow to Firm in Business Central
Income tax is treated as zero: the Business Central evaluation chart of accounts has no account for it.
Cost of sales (period total)
- Category Cost of Goods Sold (26) and every category below it
- Plus 3 accounts assigned directly: 50310 Project Costs, 50320 Project Cost Applied, 50410 Purchase Variance, Retail
10 posting accounts in total.
The full account list is on the Cost of sales page.
Income tax (period total)
Treated as zero: Business Central has no account for income tax.
The full account list is on the Income tax page.
Inventory (change over the period)
- Category Inventory (6) and every category below it
12 posting accounts in total.
The full account list is on the Inventory page.
Non-current assets (change over the period)
- Category Fixed Assets (7) and every category below it
- Plus 12 accounts assigned directly: 11100 Development Expenditure, 11200 Tenancy, Site Leasehold and similar rights, 11300 Goodwill, 11400 Advanced Payments for Intangible Fixed Assets, 12110 Building, 12120 Cost of Improvements to Leased Property, 12130 Land, 13100 Long-term Receivables, 13200 Participation in Group Companies, 13300 Loans to Partners or related Parties, 13400 Deferred Tax Assets, 13500 Other Long-term Receivables
17 posting accounts in total.
The full account list is on the Non-current assets page.
Operating expenses (period total)
- Category Expense (31) and every category below it
- Plus 3 accounts assigned directly: 60410 Utilities Expense - Power Plant, 66200 Depreciation, Equipment, 67400 Miscellaneous
- Except category Interest Expense, account 91000 Currency Losses
102 posting accounts in total.
The full account list is on the Operating expenses page.
Other income and expenses, net (period total)
- Category Income, Interest (24) and every category below it
- Plus 6 accounts assigned directly: 40310 Income from securities, 40320 Management Fee Revenue, 40380 Currency Gains, 40390 Other Incidental Revenue, 81200 Gains and Losses, 91000 Currency Losses
7 posting accounts in total.
The full account list is on the Other income and expenses, net page.
Revenue (period total)
- Category Income, Services (19) and every category below it
- Category Income, Product Sales (20) and every category below it
- Category Income, Jobs (21) and every category below it
- Category Sales Discounts (22) and every category below it
- Category Sales Returns & Allowances (23) and every category below it
- Category Job Sales Contra (25) and every category below it
- Plus 8 accounts assigned directly: 40410 Job Sales, 40420 Job Sales Applied, 40430 Sales of Service Contracts, 40440 Sales of Service Work, 40910 Discounts and Allowances, 40920 Invoice Rounding, 40930 Payment Tolerance, 40940 Sales Returns
13 posting accounts in total.
The full account list is on the Revenue page.
Trade payables (change over the period)
- Plus 2 accounts assigned directly: 22100 Accounts Payable, Domestic, 22200 Accounts Payable, Foreign
2 posting accounts in total.
The full account list is on the Trade payables page.
Trade receivables (change over the period)
- Category Accounts Receivable (4) and every category below it
5 posting accounts in total.
The full account list is on the Trade receivables page.
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