What is the first step in calculating Free Cash Flow (FCF)?

• A. Subtracting taxes
• B. Revenue
• C. Calculating COGS
• D. Gross margin

Answer: (B)

The first step in calculating Free Cash Flow (FCF) involves starting with revenue, as FCF begins with measuring a company's ability to generate cash from its operations. Revenue is the total income generated by the sale of goods or services before any expenses are deducted. It serves as the foundation for assessing how much cash a business can generate before accounting for costs.

Once you have revenue, the subsequent steps in calculating FCF typically involve subtracting operating expenses, taxes, and investments in capital assets from this amount. By beginning with revenue, you establish a clear picture of the company's operational performance, which is crucial for determining how efficiently a company converts its sales into cash flow. The calculation of COGS, gross margin, and taxes all come after the initial revenue figure, serving to refine that revenue into a usable cash flow metric.