Skip to content
× FreshBooks App Logo
Official App
Free - Google Play
Get it
You're currently on our US site. Select your regional site here:
6 Min. Read

What is Levered Free Cash Flow (LFCF) & How To Calculate It?

What is Levered Free Cash Flow (LFCF) & How To Calculate It?

Every entrepreneur looks forward to the point where they start growing their business profit. For new businesses, it takes time and wise money management strategies to boost cash flow

Calculating your Levered Free Cash Flow will tell you how much you are really making after all expenses are paid.  

In this guide, learn what Levered Free Cash Flow is, how it differs from other cash flow formulas, and how to calculate it in your business.

Here’s What We’ll Cover:

Cash Flow Projections 

1. What is Discounted Cash Flow (DCF)? 

2. Levered Cash Flow

3. Levered Free Cash Flow

How to Calculate Levered Free Cash Flow for Your Business

A Strong LFCF Indicates a Strong Business 

More Resources on Cash Flow

Cash Flow Projections 

There are 3 important terms we’ll go over in this article to help you understand the main components of cash flow projections:

  1. Discounted Cash Flows (DCF’s) 
  2. Levered Cash Flow (LCF) 
  3. Levered Free Cash Flow (LFCF) 

Why Track Cash Flow Projections? 

Keeping track of cash flow projections is crucial for any small business. Proper financial management will give you an idea of profits, expenses, and overall business growth. 

Tips for Tracking Cash Flow:

  • Keep a cash flow statement 
  • Track long-term and short-term obligations
  • Use an accounting software to record changes in business financials 
  • Make a timeline of long-term and short-term goals
  • Calculate your LFCF, DCF, and LCF 

In order to calculate your Levered Free Cash flow, you must learn what Discounted Cash Flows (DCF’s) are, and how Levered Cash Flow (LCF) and Levered Free Cash Flow (LFCF) go hand-in-hand when navigating your business accounting. 

1. What is Discounted Cash Flow (DCF)? 

Discounted Cash Flow (DCF) is a method used to evaluate an investment by discounting predicted future cash flows. 

In other words, it tells you how much of a profit you’ll make from a future investment. It does this by comparing cash flow projections with the discount rate (cost of capital) to establish the future cash inflows of the business projections.

Use DCF Analysis to Predict if a Project or Investment is Profitable

Elements of Discounted Cash Flow:

  • Projected time period 
  • Projected annual cash flow 
  • Discount rate or annual interest rate
  • Terminal value 

Entrepreneurs use DCF analysis when taking on new business projects to get a solid estimate of how much money they have for the investment. The higher the DCF, the greater return the investment generates.

 In contrast, if the DCF is lower than the initial cost, the project should be reevaluated.

DCF analysis collects data on operating expenses, debts, and taxes and uses that data to come up with two variables: Levered Free Cash Flow (LCF) and Levered Cash Flow (LFCL).

2. Levered Cash Flow

Levered Cash Flow is essentially the net cash flow that a business brings in before removing interest expenses and short-term and long-term financial obligations (debt, loans, taxes, etc.) 

Every growing business should have a strong sense of their cash flow projections. By calculating both LCF and LFCF, you’ll know how strong your business profits are. 

A small business just starting out may have a large amount of debt and overhead costs to manage, making the difference between LCF and LFCL low. 

In contrast, a large gap between the two numbers indicates a healthy budget and flexibility to take on new projects or markets. 

  • Small gap between LCF and LFCF = Tight business budget 
  • Large gap between LCF and LFCF = Strong, flexible budget 

Both numbers can prove to be a resource to small business owners seeking out detailed insight on their business accounting, but if you’re looking to simplify your investment strategy, finding your Levered Free Cash Flow is going to take priority. 

3. Levered Free Cash Flow

LFCF is a demonstration of a company’s cash flow after it has paid all of its financial obligations. 

Whether taking on a new project, or expanding into a new market, entrepreneurs and freelancers should use LFCF to get a clear understanding of what their financial outcome looks like before making costly expansions.

Because there are so many different expenses tied into owning and operating a business, making a projected cash flow analysis is crucial as not to deplete resources on new projects. 

Costs that Affect Levered Free Cash Flow: 

  • Business loans 
  • Capital investments & capital assets 
  • Operating costs
  • Annual interest rate 
  • Accounting expenses 
  • Current assets 

When businesses generate a positive LFCF, it shows that they’re capable of covering their obligated expenses (debts/taxes). 

Additionally, when a company has a strong levered free cash flow, it means that they have an increasing amount of profit accumulating. Businesses can use its levered free cash flow to pay dividends, debt obligations, or reinvest in the business. 

How to Calculate Levered Free Cash Flow for Your Business

We know the importance of a strong LFCF, so how do we calculate it? 

It takes time for a new business to gain capital. Keeping a cash flow statement and thoroughly outlining your long-term and short-term financial obligations will help you get a more specific calculation of your cash flow figures and overall financial performance. 

To calculate the LFCF, we need to know:

  • Net earned income: This is the total that your business has brought in before interest, taxes, deprecation, and amortization. 
  • Net working capital: The amount of money your business has available for day-to-day operations 
  • Mandatory debt payments: obligatory expenses your business owes (lenders, investment bankers, interest, etc.)
  • Capital expenditures: Any business investments such as property, equipment, and inventory 

Levered Free Cash Flow Formula: 

Levered free cash flow = Net earned income - change in net working capital - mandatory debt payments - capital expenditures

Once you collect all of this financial data and plug it into the Levered free cash flow formula, you will determine your overall levered cash flow projection. 

Finding both your Levered Free Cash Flow and your Levered Cash Flow will let you compare the gap between the two to get a grasp of your business profits before and after paying company costs. 

Tips for Calculating LFCF:

  1. Create a balance sheet that outlines all of your financial statements 
  2. Strategize mandatory debt payments to be consistent and manageable 
  3. Long-term cash flow analysis will give you more thorough insight on LFCF
  4. Reevaluate your cash flow statement and LFCF analysis when increases or decreases in net earned income arise 

A Strong LFCF Indicates a Strong Business 

Whether you’ve just started out on your small business venture, looking to expand different markets, or take on a new project, finding your Levered Free Cash Flow is going to give you the best indication of your financial performance, and whether or not you’re on a positive trajectory. 

Set yourself up for financial success by familiarizing yourself with your cash flow and learning the formula to calculate your levered free cash flow. 

More Resources on Cash Flow