If accounts receivable increases, what effect does it have on free cash flow (FCF)?

When accounts receivable increases, it indicates that a company is selling more on credit and has not yet collected cash from these sales. In the context of free cash flow (FCF), this increase in accounts receivable means that cash is tied up in assets rather than being available for immediate use. Since free cash flow is calculated as cash from operations minus capital expenditures, an increase in current assets like accounts receivable represents a use of cash, which reduces the amount available for free cash flow.

This connection clarifies why the increase in accounts receivable decreases free cash flow: while sales may be strong, the lack of immediate cash collection implies that funds are not currently at the company’s disposal for reinvestment, debt repayment, or distribution to shareholders. Thus, the increase in current assets effectively reduces the free cash flow.