What is Cash Flow Formula and How to Calculate It? (2024)

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April 13, 2023

What is Cash Flow Formula and How to Calculate It? (1)

Twenty-nine percent of small businesses fail because they run out of money. To avoid this, you need to know how to calculate cash flow for your company before it gets too late. Luckily, there are different cash flow formulas to help small businesses monitor how money moves in and out as they go about their day-to-day operations.

This article covers three simple methods for calculating cash outflow and inflow:

  • Cash Flow Statement Formula
  • Free Cash Flow Formula
  • Operating Cash Flow Formula

Here’s What We’ll Cover:

Cash Flow Statement Formula

Free Cash Flow Formula

Operating Cash Flow Formula

Why Calculating Cash Flow is Important

Wrapping Up

More Accounting Resources for Businesses

Cash Flow Statement Formula

A cash flow statement is one of the most important accounting documents for small businesses.

A cash flow statement is a record of financial transactions over time. In a cash flow statement, you will find information like:

  • Operating Activities: This is the money used for day-to-day business operations, including cash payments and other financial activities.
  • Investing Activities: This refers to cash for business investments.
  • Financing Activities: This is the money generated from business loans and capital contributions.

Some businesses also list non-cash expenses in their statements. Companies use these data sets for cash flow calculations.

How to Calculate Cash Flow Using a Cash Flow Statement

Add or subtract all the cash from operating activities, investing activities, and financing activities. Then, add the result to your beginning cash balance. This is interpreted as;

Cash Flow = Cash from operating activities +(-) Cash from investing activities +(-) Cash from financing activities + Beginning cash balance

Here’s how this formula would work for a company with the following statement of cash:

  1. Operating Activities = $30,000
  2. Investing Activities = $5,000
  3. Financing Activities = $5,000
  4. Beginning Cash = $50,000

Cash Flow = $30,000 +(-) $5,000 +(-) $5,000 + $50,000 = $70,000

Free Cash Flow Formula

While a cash flow statement shows the cash inflow and outflow of a business, free cash flow is a company’s disposable income or cash at hand.

It is the leftover money after accounting for your capital expenditure and other operating expenses. Free cash flow helps companies to plan their expenses and prioritize investments.

How to Calculate Free Cash Flow

Add your net income and depreciation, then subtract your capital expenditure and change in working capital.

Free Cash Flow = Net income + Depreciation/Amortization – Change in Working Capital – Capital Expenditure.

  • Net Income is the company’s profit or loss after all its expenses have been deducted.
  • Depreciation and Amortization: Depreciation accounts for the reduction of a current asset’s value over time, while amortization means spreading the cost of an intangible asset over its lifetime.
  • Working Capital is the money used for running the daily activities of a business.
  • Capital Expenditure refers to fixed business assets like land and equipment.

You’ll find these financial numbers in your company’s balance sheet or income statement. Here’s a practical example of how this cash flow analysis works.

Let’s say your flow from operations at the end of the first quarter are as follows;

  • Net Income = $100,000
  • Depreciation = $2000
  • Change in Working Capital = $15,000
  • Capital Expenditure = $40,000

Free Cash Flow = $100,000 + $2,000 – $15,000 – $40,000 = $47,000

Operating Cash Flow Formula

Operating cash flow is the money that covers a business’s running costs over a fixed period of time.

Wondering how this is different from free cash flow? Unlike the latter, operating cash flow covers unplanned expenses, earnings, and investments that can affect your daily business activities.

Tracking cash from operations gives businesses a clear idea of how much they need to cover operating expenses over a specific period. Companies can also use a cash flow forecast to plan for future cash inflows.

How to Calculate Operating Cash Flow (With Example)

Calculating cash flow from operations is easy. All you have to do is subtract your taxes from the sum of depreciation, change in working capital, and operating income.

Operating income is also called earnings before interest and tax (EBIT), and it shows how profitable a company is before tax deductions and interest expenses. You’ll find this information in your financial statement.

Operating Cash Flow = Operating Income + Depreciation – Taxes + Change in Working Capital.

If a company has an operating income of $30,000, $5,000 in taxes, zero depreciation, and $19,000 working capital, its operating cash flow is: $30,000 – $5,000 + $19,000 = $44,000.

Why Calculating Cash Flow is Important

  1. Investors use discounted cash flow to determine the value of a business and peg their rate of return.
  2. It allows for better business decision-making.
  3. A positive cash flow shows that your company is healthy.

Wrapping Up

Knowing how to calculate cash flow can be a game-changer for small businesses. At first, it can be challenging, but you will manage your business finances better once you get the hang of things.

More Resources on Small Business Accounting

Straight Line DepreciationFIFO MethodBusiness Expenses
Debit vs CreditHow To Calculate Total AssetsBusiness Expense Categories
COGSNet Operating LossWhat is a write-off?
Break Even Point FormulaRetained Earnings FormulaGross Profit Margin Formula

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What is Cash Flow Formula and How to Calculate It? (2024)

FAQs

What is Cash Flow Formula and How to Calculate It? ›

Important cash flow formulas to know about:

What is a What is the formula for calculating free cash flow? ›

What is the Free Cash Flow (FCF) Formula? The generic Free Cash Flow (FCF) Formula is equal to Cash from Operations minus Capital Expenditures. FCF represents the amount of cash generated by a business, after accounting for reinvestment in non-current capital assets by the company.

How do you calculate good cash flow? ›

A basic way to calculate cash flow is to sum up figures for current assets and subtract from that total current liabilities. Once you have a cash flow figure, you can use it to calculate various ratios (e.g., operating cash flow/net sales) for a more in-depth cash flow analysis.

Why do we calculate cash flow? ›

A cash flow statement tracks the inflow and outflow of cash, providing insights into a company's financial health and operational efficiency. The CFS measures how well a company manages its cash position, meaning how well the company generates cash to pay its debt obligations and fund its operating expenses.

What is cash flow formula with example? ›

The formula for operating cash flow is: Operating cash flow = operating income + non-cash expenses – taxes + changes in working capital The restaurant's operating cash flow therefore equals $20,000 + $1,500 – $4,000 – $6,000, giving it a positive operating cash flow of $11,500.

How do you explain cash flow? ›

Cash flow is the movement of money in and out of a company. Cash received signifies inflows, and cash spent is outflows. The cash flow statement is a financial statement that reports a company's sources and use of cash over time.

What is free cash flow for dummies? ›

You figure free cash flow by subtracting money spent for capital expenditures, which is money to purchase or improve assets, and money paid out in dividends from net cash provided by operating activities.

What is the formula for cash profit? ›

Cash profit is a measure of a company's financial health, calculated as the cash inflows from operating activities minus the cash outflows from operating activities.

How to calculate monthly cash flow statement? ›

The cash flow balance is often determined on a monthly basis:
  1. Monthly cash flow balance = Monthly inflows - Monthly outflows.
  2. Investing cash flow = Incoming investment cash flows - outgoing investment cash flows.
  3. Financing cash flow = Incoming financing cash flows - outgoing financing cash flows.
Oct 4, 2022

What is the common measure of cash flow? ›

Free cash flow

Generally speaking, FCF is the flow of money through the business, minus capital expenditures (equipment, mortgages, etc.). It's a straightforward calculation: take earnings before interest and tax (EBIT) and then subtract capital and related expenditures.

What is a normal cash flow? ›

Normal cash flows consists of (1) initial negative cash flows (i.e., costs) and (2) subsequent positive cash flows (i.e., revenues generated from the project or investment). Non-normal cash flows can have alternating positive and negative cash flows over time.

How to calculate beginning cash balance? ›

The beginning cash balance is the ending cash balance from the previous period giving a starting point to work from when adding up all of the new cash inflows and outflows during the current period.

What is the basic formula for monthly cash flow? ›

All types of cash flow formulas explained
Monthly cash flow balance= Monthly inflows - Monthly outflows
Investing cash flow= Incoming investment cash flows - outgoing investment cash flows
Financing cash flow= Incoming financing cash flows - outgoing financing cash flows
4 more rows
Oct 4, 2022

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