Free cash flow, commonly abbreviated as FCF, is the cash a company produces after paying its operating expenses and funding the investments needed to support the business. Those investments typically include capital expenditures for long-term assets and, depending on the formula, changes in net working capital.
The central idea is that accounting profit does not equal cash generation. Net income includes non-cash expenses, follows accrual accounting, and reflects financing decisions such as interest expense. Free cash flow adjusts for these items to show how much cash the underlying business generates for its capital providers.
That cash can be used to repay debt, pay dividends, repurchase shares, make acquisitions, or accumulate on the balance sheet. Management does not necessarily distribute all of it. The word “free,” despite how it sounds, means available for allocation rather than automatically paid to investors.