Levered Free Cash Flow

You own a snow cone stand. You had to borrow $10,000 to buy it, which you are paying back to the tune of $500 a month. You work an average of 20 days a month, so that amounts to $25 a day that has to go to meeting your financial obligations, i.e. repayment of the money you borrowed to buy the business.

At the end of today's workday, you made $200 in cash. You sold $500 in snow cones and it cost you $300 to buy the supplies. You now have $200 more in your pocket then when you started the day. Your cash flow is +$200. But, you still have to pay that $25 financial obligation.

The $200 figure represents your unlevered free cash flow. It's the money you have left before paying off that loan. After you make your daily payment, you have $175 left. That figure represents your levered cash flow.

The term applies to the cash a company generates after paying off the amount needed to meet its financial obligations.