In one sentenceThe cash left from operating cash flows after spending on the fixed assets the business needs. It is what the business can use to repay debts or make distributions.
Simply put
Operating cash flow alone is not enough: the business needs to renew its equipment and vehicles. What is left after that is the truly free money.
If it is negative for several years in a row, the business is funding its survival from loans or from the owners.
Worked example
A factory's net operating cash flow is 400,000 SAR, and it spent 150,000 SAR on buying equipment.
Net operating cash flow400,000
− Spending on fixed assets(150,000)
Free cash flow = 400,000 − 150,000250,000 SAR
Formula: Net operating cash flow − capital expenditure
Don't confuse it with
Net profitNet profit is an accounting figure that deducts depreciation, while free cash flow is a cash figure that deducts what was actually paid to buy assets.