FCFF Calculation

This article explains how free cashflow to the firm (FCFF) is calculated in Model Reef.

You will learn:

• What FCFF means in the context of Model Reef.

• How FCFF is derived from the Cash Waterfall.

• How FCFF is used in NPV and IRR calculations.

FCFF is the cashflow available to all capital providers after operations and tax but before financing flows.

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1. Conceptual definition of FCFF

In Model Reef, FCFF represents cashflow available to both debt and equity holders, after:

• Operating performance.

• Tax payments.

• Working capital movements.

• Capex requirements.

It does not include:

• Debt drawdowns or repayments.

• Equity injections or dividends.

Those are financing flows and belong in the FCFE and capital structure analysis.

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2. FCFF from the Cash Waterfall

The Cash Waterfall is the starting point for FCFF.

A typical sequence is represented step-by-step below:

1

Revenue

Top-line sales / revenue.

2

COGS

Cost of goods sold directly attributable to revenue.

3

Opex

Operating expenses excluding staff costs (if treated separately).

4

Staff costs

Payroll and related staff expenses.

5

EBITDA

Earnings before interest, tax, depreciation and amortisation.

6

Tax paid

Actual cash taxes paid.

7

Change in net working capital

Movements in working capital items (receivables, payables, inventory, etc.).

8

Operating cashflow after tax and working capital

Cashflow from operations after accounting for tax and working capital movements.

9

Capex

Capital expenditure (cash outflows for investing in fixed assets).

The engine constructs FCFF for valuation as:

FCFF
= Operating cashflow after tax and working capital
minus Capex

This gives a post tax, pre financing cashflow.

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3. Link to the Cashflow Statement

The Cashflow Statement and Cash Waterfall are consistent with each other.

If you prefer to think in Cashflow Statement terms, FCFF can be described as:

• Operating cashflow after tax.

• Minus capex cashflows in Investing cashflows.

• Excluding Financing cashflows.

Internally, Model Reef uses the Cash Waterfall because it provides a cleaner bridge from EBITDA and working capital.

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4. FCFF and enterprise value

When you choose to value the business using FCFF:

• FCFF is discounted at WACC.

• The discounted FCFF series plus discounted terminal value give enterprise value.

• To move from enterprise value to equity value you would adjust for net debt and similar items.

Model Reef can surface both FCFF based and FCFE based valuations so you can cross check results.

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5. FCFF in scenarios

In scenarios you can:

• Compare FCFF paths across Base, Downside and Upside cases.

• See how changes in growth, margins, working capital and capex affect FCFF.

• Check whether value is driven more by near term FCFF or the terminal value.

This supports robust valuation discussions with investors and lenders.

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