In a financial projection, how do you arrive at Free Cash Flow from Revenue?

• A. Subtract Depreciation and Capital Expenditures
• B. Subtract COGS and Operating Expenses, then adjust for taxes and working capital
• C. Add back Depreciation and Other Charges
• D. Subtract Interest Expense and Taxes

Answer: (B)

To arrive at Free Cash Flow from Revenue, the correct approach involves first accounting for the costs associated with generating that revenue. This includes subtracting the cost of goods sold (COGS) and operating expenses from revenue to find the operating income. After determining the operating income, adjustments must be made for taxes to reflect the net income.

Once the net operating income is obtained, adjustments for changes in working capital are typically necessary. Working capital adjustments account for any increases or decreases in current assets and current liabilities that could affect the cash available from operations.

After all these calculations, what remains is the operating cash flow, which, when adjusted for capital expenditures (the investments in fixed assets), ultimately leads to Free Cash Flow.

Therefore, this choice encompasses the essential steps: starting from revenue, deducting core operational costs (COGS and operating expenses), adjusting for taxes, and considering working capital changes, forming a clear pathway to determine Free Cash Flow.