Financial professionals often use mysterious terms and abbreviations in connection with cash flow management. We hear and read about cash flow (CF), EBITDA, Free Cash Flow (FCF), OPEX and CAPEX. But what exactly do these terms, also used in common parlance, mean and how do they differ? We will clearly explain these technical terms to you in CAFLOU Academy so that you never get lost in conversation with experts again.
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Cash Flow
The ambiguity of technical terminology also contributes to the more difficult intelligibility of the language of economic professionals. However, few people now wonder about the meaning of the routinely used term Cash Flow. It is simply a cash flow, i.e. the difference between a company’s income for a certain period and its expenses in the same period. However, the question is how to learn such a number from the company’s bookkeeping.
If a company compiles a Cash Flow Statement, then it can easily obtain information from it about the increase or decrease in cash and cash equivalents over a period of time – usually a year. If you cannot look in the Cash Flow Statement, you can prepare a cash flow outlook by editing the income statement. We described how to do it in our article How to prepare a cash flow statement.
FCF or Free Cash Flow
If you are now more interested to what extent your company makes money, then you can turn your attention to the indicator hidden under the abbreviation FCF. Financial analysts use it to monitor the amount of cash that can be withdrawn from the company without jeopardizing its operation. Free Cash Flow says how much money the company will have left after deducting the expenses necessary to maintain its production capacity, including the purchase of new or maintenance of existing equipment, facilities and other assets, from its operating income. This free cash flow can then be used to pay remuneration to providers of financial capital, i.e. business owners in the form of profit sharing and bankers in the form of credit repayments, without jeopardizing the functioning of the company.
EBITDA or earnings
E = Earnings, B = Before, I = Interest, T = Taxes, D = Depreciation and A = Amortization, in short EBITDA, is another and perhaps even more widespread indicator in the company’s financial management. Its use as a simplified view of operating cash flow gives analysts a quick idea of the company’s value.
The amount of EBITDA can be easily obtained from the data presented in the income statement, namely as the sum of operating result and depreciation of intangible and tangible fixed assets. In a broader sense, you can also add adjustments (stated as value adjustments to inventories and receivables in the income statement) and reserves. The previously introduced cash flow indicators show the company’s ability to generate money. EBITDA is less accurate in its statement; however, controlling is mainly about the timeliness of information. And this is ensured thanks to the relatively easy determination of EBITDA. For this reason, no one is too surprised that this is the most watched controlling indicator.
CAPEX and OPEX or investment and operating expenses
For many, the more or less mysterious abbreviation CAPEX (= Capital Expenditures) is also associated with cash flow. These are expenditures for the acquisition of fixed assets. If you have a Cash Flow Statement, it is the main part of the investment cash flow, specifically the item Expenses related to fixed assets. If you don’t have a Cash Flow Statement available, two details from the balance sheet and one from the income statement will suffice. In the balance sheet, subtract the value of fixed assets for the previous period from their net value for the current period and add the amount of depreciations from the profit and loss statement.
OPEX (= Operational Expenditures) means non-investment, current operating expenses of the company. However, not all national accounting systems monitor them individually according to their legislative standards and it is often difficult to deduce them.
Do you have experience with using these abbreviations? Or have you come across other ones that you would like to have explained? Contact us, we will be happy to answer or direct you.
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Article author: Pavlina Vancurova, Ph.D. from 
In cooperation with Pavlina Vancurova, Ph.D., specialist in business economics from consulting firm PADIA, we have prepared the Caflou cash flow academy for you, the aim of which is to help you expand your knowledge in the field of cash flow management in small and medium-sized companies.
In her practice, Pavlina provides economic advice in the area of financial management and setting up controlling in companies of various fields and sizes. In 2011, she co-founded the consulting company PADIA, where she works as a trainer and interim financial director for a number of clients. She also draws on her experience as the executive director of an international consulting firm. She worked as a university teacher and is the author of a number of professional publications.