Free cash flow: measuring the cash actually available

Quick answer. Free cash flow (FCF) measures the cash left after funding operations and investments. You build it from operating profit (EBITDA), then deduct a normalised tax, the change in working capital and capital expenditure (capex). In 2026, the normalised tax uses the French corporate tax rate of 15% up to 42,500 euros of profit, then 25%.

A strong net profit does not mean cash follows. A company can post a comfortable result and still run short of cash, because customers pay late, inventory swells or it invests heavily. Accounting profit works on an accruals basis; cash works on actual receipts and payments.

Free cash flow answers one simple, decisive question: how much cash does my business genuinely generate each year, once operations and investments are funded? It is this balance, not the reported profit, that serves to repay debt, pay dividends or buy back shares.

In the management files we handle, FCF is the indicator that reconciles the owner with the reality of the bank account. It is also the foundation of discounted cash flow valuation methods. A buyer does not purchase an accounting result: they purchase a sustainable ability to generate cash.

Operating profit (EBITDA, close to the French EBE) measures operating profitability before depreciation, financial charges and tax. According to France's INSEE, the EBE equals value added, minus employee compensation and other production taxes, plus operating subsidies. It is an excellent starting point, but it is not available cash.

Free cash flow starts from EBITDA and then incorporates three items it ignores: tax on profit, the cash tied up in the operating cycle (working capital), and investments. In short, EBITDA tells you what operations earn; FCF tells you what is left at the company's disposal once everything is funded.

The distinction is far from academic. Two companies with the same EBITDA can show opposite free cash flows if one funds growth through soaring working capital and heavy investment, and the other does not. That is precisely why you should not stop at EBITDA.

We use the top-down build, starting from EBITDA. It isolates each adjustment and stays readable for a non-financial owner.

1. Start from EBITDA. Take the operating profit from your income statement. It already neutralises non-cash items such as depreciation.
2. Deduct a normalised tax. Apply the corporate tax rate to operating profit, regardless of your financial debt, to measure intrinsic performance. In 2026, the 15% reduced rate applies up to 42,500 euros of profit, then the standard 25% rate.
3. Adjust for the change in working capital. A rise in working capital consumes cash, so you subtract it. A fall releases cash, so you add it.
4. Subtract capital expenditure (capex). Remove maintenance and growth investments for the period. This is the cash actually spent to sustain and grow the business.
5. Conclude on FCF. The balance is free cash flow. Positive, it funds debt and shareholders; negative, it signals an activity that consumes cash.

The shorthand formula fits on one line: FCF = EBITDA minus normalised tax minus change in working capital minus capex. Each term reads directly from your financial statements, provided your accounts are kept cleanly and your working capital is correctly computed.

Take a services SME with 2025 EBITDA of 200,000 euros and taxable operating profit of 150,000 euros. Here is the calculation.

The normalised tax breaks down as follows: 15% on the first 42,500 euros of profit, that is 6,375 euros, then 25% on the remaining 107,500 euros, that is 26,875 euros, for a total of 33,250 euros. This SME therefore generates around 101,750 euros of genuinely available cash, even after investing and funding its growth. It is this amount, not the 200,000 euros of EBITDA, that can repay a loan or reward shareholders.

FCF has two main uses. First, management: a sustainably positive free cash flow signals a healthy company, able to self-fund and weather a setback. Second, valuation: discounted cash flow methods rest on projecting future FCF, discounted at a rate reflecting risk. It is the core of any business valuation engagement.

A good free cash flow is not judged in absolute terms but against your business model. A mature company should generate solid, regular FCF. A hypergrowth startup may post a deliberately negative FCF, because it invests heavily to capture a market: the focus then becomes the trajectory toward profitability, not the instant level.

To interpret your FCF, compare it over time and relate it to your revenue. An FCF that falls while profit rises almost always reveals runaway working capital or poorly phased investments. To go further, you can test scenarios with our working capital and cash simulator.

Several situations change the calculation or interpretation. A sole trader or a pass-through entity has no corporate tax in the classic sense: the normalised tax is then replaced by the owner's personal income tax on the result, which changes the basis of the tax adjustment.

A company taxed at the reduced rate must verify its eligibility: revenue of 10 million euros or less, capital fully paid up and held at least 75% by individuals. Outside that framework, the normalised tax is computed at the 25% rate only.

High-working-capital activities (trading, e-commerce, construction) see their free cash flow durably penalised by the operating cycle. Conversely, an activity paid in advance (subscriptions, ticketing) benefits from negative working capital that boosts FCF. In all cases, knowing how to reduce swelling working capital is the first lever for improving cash.

Finally, distinguish FCF available to the firm (before financial charges) from FCF available to shareholders (after debt service). The former drives the valuation of the economic asset; the latter measures what genuinely accrues to owners.

A few mistakes recur and distort the analysis. Better to know them before presenting free cash flow to a banker or a buyer.

• Confusing EBITDA with available cash. EBITDA includes neither tax, nor working capital, nor capex. Presenting it as available cash seriously overstates real capacity.
• Forgetting the change in working capital. This is the most frequent and costly omission. Unfunded growth swells working capital and can turn FCF negative despite rising EBITDA.
• Mixing maintenance and growth capex. Separate maintenance and growth capital expenditure. An FCF that does not even cover maintenance capex is a serious warning sign.
• Applying the wrong corporate tax rate. Using 25% on the entire profit when the 15% reduced rate applies distorts the normalised tax and therefore FCF.
• Confusing FCF with net cash flow. FCF is a subset: it deliberately ignores financing (loans, capital contributions). For the full picture, you need to read a complete cash flow statement.

Our reading. Free cash flow is the first indicator we look at when an owner asks whether they can pay dividends, repay a shareholder loan or invest. Net profit answers the tax question; FCF answers the cash question, which is often the real urgency. The two almost never coincide.

The underestimated risk. Growth destroys cash before it creates it. We were recently approached by the head of a distribution SME, worried to see cash melting away while revenue jumped 30%. The diagnosis was clear: EBITDA was rising, but working capital had doubled to fund inventory and customer terms, and free cash flow had turned negative. Without correcting working capital and phasing investments, the growth was leading to a cash squeeze. This is exactly what FCF reveals and what accounting profit hides.

We recommend calculating free cash flow at least once a year, ideally quarterly for seasonal or high-working-capital activities. This discipline transforms the dialogue with the banker and calmly prepares a sale. As a firm registered with the French Institute of Chartered Accountants and acting as statutory auditor, we base this calculation on reliable financial statements, an essential condition for an FCF to hold up before a third party.

Hayot Expertise tip. Before any decision to distribute, invest or sell, have your normalised free cash flow established over three financial years. We build it as part of a business valuation engagement or an outsourced CFO assignment, and project it into a reliable forecast. You then steer on real cash, not on a misleading profit.