Outline

1. Question 1: Explain what is free cash flow as opposed to just cash flow.

• Paragraph 1: Definitions of cash flow and free cash flow.
• Paragraph 2: Objectives

                                 : Scopes and

                                 : Complexity of free cash flow and cash flow.

• Paragraph 3: Time Consumption

                                 : Applications and

                                  : Sources of free cash flow and cash flow

2. Question 2: Why is it important to calculate free cash flow for a company?

• Paragraph 1: Indicates a company’s health
• Paragraph 2: Helps measure the business’s growth and success

                                : Can be used to expand operations

• Paragraph 3: Informs how much Money is in disposal

                                : Conveys a Company’s Prospect to generate profits

                                                  Learning Engagement

 

Explain what free cash flow is as opposed to just cash flow?

Free cash flow, by definition, illustrates the cash at hand the company can use to pay back creditors or gains and profits to investors (Ross et al., 2010). Free cash flow is used to calculate the present value of a business. While on the other hand, cash flow means the net amount of cash and cash complements being channeled in and out of a business; Cash collected sums up inflows, while expended money sums up outflows. Cash flow finds out the net cash inflow of management, investing, and funding projects of the business.

With free cash flow, the primary objective is to determine the value of the business for investors. As for cash flow, the primary aim is to determine the actual net cash inflow of the company. Furthermore, the scope of free cash flow is narrow, while that of cash flow is comprehensive. When we look at the complexity of the two, compounding free cash flow is complex when calculating the aggregate before using the formula. In the same way, the compounding of cash flow becomes complex when collective cash and non-cash dealings happen throughout the year.

 As a result, free cash flow calculation does not consume much time if all the information is obtainable. Similarly, estimation of cash flow takes an average time to compose. Finally, Free Cash Flow is applicable when determining value under the DCF Method, while Cash flow is among the four extensive accounting in financial accounting. However, when determining both cash flow and free cash flow, an income statement is needed.

 

 

Why is it important to calculate free cash flow for a company?

Calculating free cash flow enables a company to know its health depending on its negative or positive. Free cash flow is a figure typically reviewed from the investors' approach. Similarly, it is an actual figure for business owners, including those not seeking to accumulate capital through selling equity. Entities seeking to invest might prospectively appraise businesses with a healthy flow of unrestricted cash on account of the promising future. Furthermore, investors can substantially invest in companies that record a high free cash flow ((Sujoko and Soebiantoro, 2007). Other investors considerably contemplate free cash flow in comparison to other estimates as it also serves as an essential footing for asset pricing.

Business owners can also measure the growth and success of their businesses by keeping tabs on the company’s free cash flow. Owners of companies with a continuous positive flow of free cash savor an abundance of options regarding utilizing the leftover money (Wang, 2010). In addition, Free cash flow can help expand operations, hire more employees, investing in auxiliary assets, and it can be used for acquisitions or paid out to shareholders as dividends.

For exceedingly small-scale businesses, free cash flow is vital because it informs them of how much money is at their disposal to expand at their own accord, whether hiring extra hands, purchasing new equipment, bringing out a new product, or motivating employees. Compared to earnings per se, Free cash flow is considerably simple in conveying the company’s perspective to generate profits and cash.