The funds from operations financial metric is most widely associated with publicly traded real estate investment trusts. This useful measure of business cash flow can be used by any type of pass-through business, such as partnerships, limited liability companies or S-corporations. FFO is the amount of net cash available to pay out to partners or shareholders.
Cash Available for Dividends or Distributions
The funds from operations calculation determines how much cash the business produced after paying all expenses and other financial obligations, such as interest on a debt and taxes. The amount of FFO would be money that is available to be paid out to shareholders, investors or partners as dividends or distributions. An alternative use would be a reinvestment back into the business.
Earnings From Business Operations
Gross earnings from the operations of a business provide the gross profits of the company. These earnings are the sales or revenues minus the cost of goods sold and minus the general and administrative business expenses. Companies widely use the acronym EBITDA -- which stands for "earnings before interest, taxes, depreciation and amortization" -- to describe a company's operating profits. From the EBITDA amount, subtracting the interest paid, taxes paid, accounting depreciation, and amortization provides the accounting net income for the business.
Pay the Other Cash Expenses
Calculate FFO by subtracting the EBITDA items that are actual cash expenditures. Depreciation and amortization are non-cash bookkeeping items, so they do not affect the cash produced by the business. Interest and taxes require real money to be sent to business lenders and government entities. The result is a basic FFO calculation of EBITDA minus interest and tax expenses.
One Final Adjustment
Some types of business use adjusted FFO to more accurately calculate free cash flow. For a business that has regular maintenance costs, modify the basic FFO calculation by subtracting the money spent for ongoing preventive or sustaining maintenance. These expenses would be a cost that is not included in the general and administration expenses, but is money that needs to be spent to keep the company's assets in good working order.
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