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What is Cash Flow Formula & How To Calculate It?

July 22, 2024

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:

Operating Activities = $30,000
Investing Activities = $5,000
Financing Activities = $5,000
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

Investors use discounted cash flow to determine the value of a business and peg their rate of return.
It allows for better business decision-making.
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 Depreciation	FIFO Method	Business Expenses
Debit vs Credit	How To Calculate Total Assets	Business Expense Categories
COGS	Net Operating Loss	What is a write-off?
Break Even Point Formula	Retained Earnings Formula	Gross Profit Margin Formula