What Is Free Cash Flow? Simple Explanation

December 8, 2025 ∙ 3 min read

What Is Free Cash Flow? Simple Explanation | FIFEC

A short explanation of key terms

FCF (Free Cash Flow): the “free” cash left over after you’ve paid for normal operations and the necessary investments.
- Simple formula: FCF = CFO − CAPEX
CFO (Cash Flow from Operations): cash generated from day-to-day operations (sales, purchases, salaries, VAT, etc.), including working-capital effects (accounts receivable/payable/inventory and also corporate income tax payable as a liability item).
CAPEX (Capital Expenditures): spending on fixed assets with a useful life of more than one year, such as machinery, equipment, renovations, hardware/software (depending on what you capitalize), etc.

In short: CFO = cash from your business, CAPEX = cash into investments, FCF = what remains free after that.

Free cash flow explained (FCF)

Free cash flow (FCF) is the cash a company really retains from its operations after paying all ongoing expenses and the required investments (such as machinery, software, maintenance). This is the cash you can use to, for example, repay debt, pay dividends, fund additional growth, or build a buffer.

Simple example

Suppose Company X has in one year:

Cash flow from operating activities: €120,000 (cash coming in from normal business, after daily operating costs)
Investments (CAPEX): €40,000 (e.g., new equipment and maintenance)

Then the free cash flow is: €120,000 − €40,000 = €80,000 free cash flow That €80,000 is the “free” cash left to spend however the company chooses.

Corporate income tax (Vpb): does it affect FCF?

In the standard definition: FCF = operating cash flow (CFO) − CAPEX And operating cash flow is after tax payments—but only to the extent that tax is actually paid in cash during that period. So:

Yes: if the BV has already paid corporate income tax in that year (e.g., via (provisional) assessments), it is typically already reflected in CFO, and therefore indirectly in FCF.
No: if Vpb has been recognized as an expense in the P&L but has not been paid yet, you only see it as a cash outflow when it is actually paid (or as a working-capital movement through corporate income tax payable).

Key difference

Profit (accounting): tax expense may be included even if you haven’t paid it yet.
Cash flow (FCF): focuses on what cash has actually been paid/received.

Practical rule of thumb: FCF looks at cash movements, not “paper costs.” Corporate income tax impacts FCF once cash actually leaves the bank. The “corporate income tax payable” balance is the bridge between accounting expense and cash flow.

Example: how Vpb affects (or doesn’t affect) FCF (BV, FY 2024)

1) Profit & loss statement (accounting)

Profit before tax: €100,000
Corporate income tax (Vpb) expense (e.g., 25%): €25,000
Net profit: €75,000

That €25,000 is an expense, but not necessarily paid yet.

2) Cash flow from operations (indirect method)

Start with net profit and adjust for non-cash items and working capital:

Net profit: €75,000
+ Change in corporate income tax payable (working capital): +€25,000 (because you booked the tax expense but haven’t paid it yet → cash remains in the company)
= Operating cash flow (CFO): €100,000

Interpretation: you recorded €25k of tax expense, but cash-wise you still have it because a liability (“corporate income tax payable”) increased.

3) Free cash flow (FCF)

Assume CAPEX was €40,000: FCF = CFO (€100,000) − CAPEX (€40,000) = €60,000 So in this year, Vpb is not a cash outflow in FCF, because you haven’t paid it yet.

Next year (2025): you do pay the Vpb

Suppose you pay the €25,000 in 2025. Then in 2025 you will see:

Change in corporate income tax payable: −€25,000 (liability decreases)
This reduces CFO by €25,000
And therefore also reduces FCF by €25,000

Bottom line: Vpb affects FCF when it is paid in cash, and “corporate income tax payable” (tax still to be paid) is the bridge between accounting costs and cash.