Levered Free Cash Flow - definition & overview
What do people mean by the term Levered Free Cash Flow?
Why is Levered Free Cash Flow (LFCF) important for Australian small businesses?
For Aussie small businesses, LFCF is a crucial measure of financial health. It goes beyond just profit and reflects your business's ability to generate actual cash. This cash is what you can use for important things like:
- Repaying debt: LFCF shows how much wiggle room you have to manage your loan repayments.
- Investing in growth: If your LFCF is positive, it indicates you have cash available to reinvest in the business, like buying new equipment or expanding your marketing reach.
- Distributing dividends to shareholders: If you have shareholders, a healthy LFCF allows you to consider paying dividends.
How is Levered free cash flow it different from Free Cash Flow (FCF)?
Free Cash Flow (FCF) is similar, but it doesn't take debt repayments into account. LFCF gives a more accurate picture by reflecting the impact of debt on your business's cash flow.
Calculating LFCF:
Calculating LFCF can be a bit complex, but generally, it involves taking your Earnings Before Interest, Taxes, Depreciation, and Amortisation (EBITDA) and subtracting:
- Capital Expenditure (CapEx): This is the money you spend on things like property, plant, and equipment.
- Changes in Working Capital: This accounts for fluctuations in your inventory and accounts receivable/payable.
- Interest Expense: This is the cost of servicing your business loans.
- Taxes: Don't forget to account for income tax.
The takeaway:
LFCF is a valuable tool for Australian small businesses to assess their financial health and make informed decisions about debt, growth, and shareholder distributions. If you're unsure about calculating LFCF, consider consulting a qualified accountant or financial advisor.
Learn about Unlevered Free Cash Flow here
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