Background The predictors of functional capacity in first episode schizophrenia among seven separable cognitive domains and clinical variables are unknown. Aim To investigate predictors of functional capacity in first episode schizophrenia and the associations between functional capacity and measures of real-world functioning. Methods Socio-demographic, clinical, and cognitive measures from a sample of patients with first episode schizophrenia spectrum disorders aged 18–34years (N=117) were examined at baseline, 4-month follow‐up, and 10-month follow-up and used to predict concurrent and longitudinal functional capacity. Symptoms were assessed with the Positive and Negative Syndrome Scale, cognitive functioning with the MATRICS Cognitive Consensus Battery, and functional capacity with the brief version of the University of California San Diego Performance-based Skills Assessment. Linear and logistic regression analyses were adjusted for age, gender, and site. Results Working memory, negative symptoms, and social cognition accounted for 41% of the variance in functional capacity at baseline. Longitudinally, verbal learning, working memory, and negative symptoms predicted 4-month functional capacity. Working memory and visual learning predicted 10-month functional capacity. Functional capacity was associated to global functioning in the univariate analysis, but in multivariable analyses global functioning, financial independence, and independent living were predicted by negative symptoms or general symptoms explaining 15–23% of the variance. Conclusions The strongest single predictor of functional capacity is working memory, followed by negative symptoms. Clinical symptoms, but not functional capacity, predicted real-world functioning. The usability of the UPSA-B in first episode schizophrenia is discussed. Neurocom, ClinicalTrials.gov Identifier: NCT00472862, http://clinicaltrials.gov/ct2/show/NCT00472862?term=neurocom&rank=1.