Impact of Repatriation on Free Cash FlowĪn additional consideration is the ability of a business to repatriate cash from a subsidiary. Conversely, if a business is shrinking, it is converting some of its working capital back into cash as receivables are paid off and inventory liquidated, resulting in an increasing amount of free cash flow. If a company is growing rapidly, then it requires a significant investment in accounts receivable and inventory, which increases its working capital investment and therefore decreases the amount of free cash flow. Impact of Growth on Free Cash Flowįree cash flow can also be impacted by the growth rate of a business. Other actions, such as accelerating the collection of accounts receivable through changes in payment terms or switching to just-in-time production systems, can be beneficial to a business while still reducing its outgoing cash flows. In these examples, management has taken steps to reduce the long-term viability of a business in order to improve its short-term free cash flows. The receipt of a large advance payment from a customerĮntering into sale and leaseback arrangements for key assets For example, positive free cash flow can be caused by:Ĭutting back on or delaying capital expendituresĪccelerating receivable receipts with high-cost early payment discountsĬutting back on key maintenance expenditures However, there can be a variety of situations in which a company can report positive free cash flow, and which are due to circumstances not necessarily related to a healthy long-term situation. The model is also used by investors to estimate the amount of cash flow that may be available for distribution to them in the form of dividends. The free cash flow model is important because it is an indicator of the financial health of a business, and particularly of its ability to invest in new business opportunities.
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