How do you build a free-cash-flow forecast, and what's the bridge from EBITDA to free cash flow?
A core FP&A interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.
THE SHORT ANSWER
Start from EBITDA and walk down: deduct cash taxes (not the P&L charge — adjust for deferred tax and any shields), then the change in working capital (an increase consumes cash — receivables/inventory up, payables down), then capex (maintenance plus growth), and any other cash items (cash interest if you want levered FCF, lease payments, restructuring/one-off cash costs, pension contributions). EBITDA minus cash tax minus ΔWC minus capex (minus cash interest for levered FCF) gives free cash flow. The reason this bridge matters in FP&A is that profitable businesses run out of cash through working-capital growth or heavy capex — EBITDA is not cash. I'd build it driver-based (WC from DSO/DPO/DIO assumptions tied to revenue, capex from the investment plan), tie it to the 3-statement model so the cash flow articulates with the balance sheet, and flag the biggest cash-versus-profit gaps (growth-driven WC, capex cycles) to management.
WHAT INTERVIEWERS LISTEN FOR
- ✓EBITDA − cash tax − ΔWC − capex (− cash interest for levered FCF) = FCF
- ✓Cash tax ≠ P&L tax; ΔWC: growth in receivables/inventory consumes cash
- ✓Profitable firms run out of cash via WC growth/capex — EBITDA isn't cash
- ✓Driver-based WC (DSO/DPO/DIO) and capex plan, articulated to the 3-statement model
COMMON MISTAKES
- ✗Treating EBITDA as cash
- ✗Using P&L tax not cash tax
- ✗Ignoring working-capital change or capex
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