What Is Free Cash Flow?
Profit is an accounting idea. Cash is what actually lands in the bank. Free cash flow, explained in plain English.
By the Sixth Element team · Updated Oct 6, 2026
Here's a slightly surprising fact: a company can report a profit and still run short of money. That's because profit is an accounting idea, and the bank balance is a cash idea. Free cash flow is the number that tracks the cash.
In plain English
Free cash flow is the money left after the company pays for the investments needed to run and grow the business.
It's worked out in two steps:
- Cash from running the business — money that actually came in from customers, minus what actually went out for staff, suppliers, taxes and so on.
- Minus investment — money spent on the things that keep the business going: new ovens, factories, computers, buildings.
What's left is “free” — the company can use it to pay dividends, buy back shares, pay down debt, or invest in something new.
An example: the bakery again
Our invented bakery brings in $100k of cash from selling bread over a year, after paying staff, flour and rent. But its oven is getting old, and it spends $30k on a new one. Its free cash flow for the year is $70k.
Next year, with no new oven to buy, free cash flow might be much higher. That's why it's worth looking at several years rather than one.
Why investors like it
Accounting profit involves estimates and timing choices. Cash is harder to dress up. When profit and free cash flow move together over the years, it's a good sign the profit is real. When profit keeps rising but cash doesn't, it's worth asking why.
From cash in to free cash
- Cash in
- $100k
- Invested
- $30k
- Free cash
- $70k
Why this matters
Cash pays for dividends, buybacks, paying down debt and new ideas — profit on paper can't. A business that reliably produces free cash flow can fund its own future. One that doesn't has to keep asking lenders or investors for more.
Try it in Sixth Element
Want to see free cash flow in action? Sixth Element charts it year by year for every company it covers.
General education, not investment advice. Examples use invented businesses and illustrative numbers.
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