The high correlation across versions of FCF suggests a low cost of potential manipulation. A positive offset
would boost FCF andwith it the firm's financial appearancewithout significantlymodifying FCF volatility. This
may explain the absence, until now, of a serious challenge to the different versions of FCF.
4. Summary and conclusions
This paper challenges the common valuation procedure adopted in corporate finance in which the flow of
Current Liabilities, or a significant portion thereof, is offset against the flow of Current Assets to create the
hybrid flow of Net Working Capital. While consistent with the methodology of the accounting Statement of
Cash Flow, this offset is inconsistent with the economic-based FCF, a financial tool designed for firm and
project valuation. This paper demonstrates that the offset can significantly distort the FCF in terms of size,
composition and volatility, leading to additional distortions in the firmor project size, debt and asset compositions,
financial leverage, risk profile, and estimated value. The conceptual and empirical analyses indicate
that management may prefer the offset-based FCF, which can be better controlled in terms of size and stability.
The corrected, narrower definition of FCFwould eliminate this flexibility. The proposed offset-free CFCF is
a logical substitute, which would better serve investors and their loyal company management, lenders, and
other stakeholders by leading to more accurate, unbiased value estimates of the firmand its planned projects.