Certified Financial Management Specialist Practice Exam

What is defined as the cash available after capital expenditures?

1. Working capital

2. Operating cash flow

3. Free cash flow

4. Net cash flow

The correct answer is: Free cash flow

The definition of free cash flow hinges on its key components, specifically being the cash generated by a company’s operations after deducting capital expenditures required to maintain or expand its asset base. This metric is vital for assessing a company's ability to generate cash that is available for distribution to investors, paying off debt, or reinvesting in the business. Free cash flow gives insight into the financial health of a company, indicating how much cash can be used freely after all essential investments are made. It serves as a crucial figure for investors as it reflects the company's potential for growth and the amount of cash available for returns. In contrast, working capital focuses on the short-term liquidity and operational efficiency, operating cash flow pertains to cash generated from core business activities without accounting for capital expenditures, and net cash flow encompasses all cash inflows and outflows during a specific period without specifically addressing capital expenditures. Understanding these distinctions reinforces the significance of free cash flow as a vital indicator of financial flexibility and potential for value creation within a business.