Relationship between FCF and Cash on the Balance Sheet
Hey guys. I am currently pre-university, self-teaching myself in investing. I have been reading books on accounting and investing and i can firmly admit that i get confused sometimes on even plain and simple things. So my question might seem to you extremely stupid, but i really got confused on this one. Free Cash flow as i understand is ACTUAL money that the business generates after setting aside money for reinvesting and maintaining the operations. If we imagine that a company has $100 in Cash on the Balance Sheet and i calculate from the Cash flow statement that the FCF is 50, is that 50 dollars part of the 100 in the Cash on the Balance Sheet ? I have even difficulty asking my question. Again, please don't jump on me because i am new to this world. Thank you!
FCF is cash flow available to equity and debt holders.
From an accounting perspective, beginning cash balance is the cash account on the prior years balance sheet. So with a 12/31 year end and you want to look at cash generated through 2014, you look at cash on balance sheet as of 12/31/2013. Then walk through cash flow statement and you'll see operating, investing, financing cash flows.
12/31/13 beginning cash + net cash flow generated / spent on 2914 statement of cash flows = 12/31/14 cash balance you see on balance sheet
note were talking about aggregate cash flow, not just free cash flow. Fcf is cash flow pre-financing cash flows and strips out non recurring cash items when you are forecasting it so there will still be post-FCF cash in flows / out flows that will be captured in the cash flow statement from an accounting perspective but not in the FCF calculation.
To directly answer your question if cash on balance sheet is 100 and FCF is 50, yes that number ultimately flows into the year end cash balance but it's not just the 50.
It's beg cash balance + FCF + other cash flows not captured in FCF calculation (financing cash flows) = 100 cash on BS
The change in the cash balance from year to year will match the increase/(decrease) in FCF on the cash flow statement
This is incorrect. Change in cash from year over year will match net cash flow on the CFL statement not "FCF". FCF is calculated on the CFL statement as operating - investing cash flows.
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