How to calculate cash flow: 3 formulas, calculations and cash flow examples (2023)

In theory,cash flowis notAlsoComplicated: It reflects how money flows in and out of your business.

Unfortunately, understanding and applying cash flow formulas doesn't always come naturally to small business owners. So much so that 60% of small business owners say they don't feel comfortableKnowledge of accounting or finance🇧🇷 But if you take the time to read these three key cash flow formulas (free cash flow, cash flow from operations, and projected cash flow), you'll be well on your way to feeling more confident about your business finances, and you're in control your cash flow.

For small businesses in particular, cash flow is one of the most important components of their financial health.A studyshowed that 30% of businesses fail because they run out of money. Using cash flow formulas can help you prepare for weak seasons and ensure you have enough cash before spending it on your business.

"It is absolutely critical for any entrepreneur to understand and plan ahead for their company's working capital needs to ensure they are able to fund growth," said Colin Darretta, co-founder and CEO of the Department of Innovation.said Forbes."There are more financial tools out there than ever, which means for those who understand and are prepared, it doesn't have to be the catastrophic liquidity crisis that often occurs in young companies."

Important cash flow formulas to know:

  • Free Cash Flow= Net Income + Depreciation/Amortization - Change in Working Capital - Capital Expenditure
  • Operating cash flow= Operating Income + Depreciation – Taxes + Change in Working Capital
  • Cash Flow Forecast= Initial Cash + Projected Inputs - Projected Outputs = Final Cash

Each of the three cash flow formulas above has its own benefits and says different things about your business. Don't be alarmed if they look complicated! Together we go through definitions, calculations and examples. Use oursFree Cash Flow Calculatorto keep track (no account required!)


1. Free Cashflow-Formel

One of the most common and important cash flow formulas is free cash flow (or FCF).

While a traditionalcash flow statement(like the kind you can get fromwave reports) gives you an overview of your company's cash balance at a given point in time, which isn't always helpful in planning and budgeting as it doesn't really reflect the cash balance you haveaccessible, which can be used for free.

Can you afford to invest in this new software? Do you have enough money to pay for this virtual assistant if youinvoicedue? How much free money do you have to spend on thank you cards for your customers?

(Video) Formula for the Statement of Cash Flows

Calculating the money you can spend (using the FCF formula) will help answer these questions and others like them.


How to calculate free cash flow

Calculating your company's free cash flow is actually easier than you think. To start, you'll need your company's income statement, or balance sheet, to get the key financial numbers.

How to calculate cash flow: 3 formulas, calculations and cash flow examples (1)


First, let's clarify some important financial terms.

  • net income– The total revenue that is left over after deducting business expenses from total revenue or sales. You can find it on your income statement.
  • depreciation and amortization: Many of your assets (e.g. devices) lose value over time. Depreciation is the measure of how that value decreases. Depreciation, on the other hand, is a method of breaking down the cost of an asset over its useful life. You can find the depreciation in your income statement.
  • working capital: Working capital is the difference between your assets and liabilities and represents the capital used in the daily operations of your business. You can calculate your working capital by summing the assets and liabilities on your balance sheet.
  • capital expense:Capital expenditures include the money your business spends on tangible assets such as land, real estate, or equipment. You can find your investments in the cash flow statement.

Knowing this, the basic formula for free cash flow looks like this:

Free Cash Flow = Net Income + Depreciation/Amortization - Change in Working Capital - Capital Expenditure

Free cash flow example

Let's take a look at a real example of this formula. Randi is a freelance graphic designer - she needs to calculate her free cash flow to see if hiring a virtual assistant for 10 hours a month is financially worthwhile.

Here's what your finances look like for the year:

  • Net Income = $80,000
  • Depreciation/Amortization = $0
  • Change in Working Capital = -$10,000
  • Capital Expense = $2,500 (Randi bought a new iMac last year)

Then Randi's free cash flow is represented by:

[$ 80.000] + [$ 0] – [-$ 10.000] – [$ 2.500] = $ 67.500

That means you have $67,500 in cash available to reinvest in your business.

(Video) Cash Flow from Operations (Statement of Cash Flows)

Looking for more details on the free cash flow formula?read here.

2. Operative Cashflow-Formel

Knowing cash flow from operations is critical to getting an accurate picture of your cash flow.

While free cash flow gives a good idea of ​​the cash available to be reinvested in the business, it doesn't always show the lion's share.to needImage of your normal daily cash flow. That's because theThe FCF formula does not take into account irregular expenses, profits or investments🇧🇷 Selling a large asset would increase your free cash flow, but it doesn't reflect thattypicalCash flow for your business. If you need a better idea of ​​your company's typical cash flow, you can use the operating cash flow (OCF) formula.

For example, if you want to get outside funding from a bank or venture capital firm, they will be more interested in your operating cash flow. The same is true when you start working with an accountant or financial advisor, so it's important to understand what OCF is like before applying for funding.


To calculate operating cash flow:

As with the free cash flow calculation above, you should have your balance sheet and income statement ready to get the numbers involved in the operating cash flow formula.

There is one more financial metric you need to know for this calculation:

  • operating result: Also called Earnings Before Interest and Taxes (or EBIT) and Profit, your operating income subtracts operating expenses (such as wages paid and cost of goods sold) from total income. You can find the operating profit on your income statement.

The basic OCF formula is:

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

How to calculate cash flow: 3 formulas, calculations and cash flow examples (2)


Operating cash flow example

To apply the cash flow from operations formula to our previous example (Randi, our favorite freelance graphic designer), let's assume her finances for the year look like this:

  • Operating profit = $85,000
  • Depreciation = $0
  • Taxes = $9,000
  • Change in Working Capital = -$10,000

Randi's operating cash flow formula is represented by:

(Video) Calculate the Present Value for Multiple Cash Flows (Intermediate Accounting I #3)

[$ 85.000] + [$ 0] – [$ 9.000] + [-$ 10.000] = $ 66.000

This means that Randi will generate $66,000 in positive cash flow from its typical operations in a typical year.

Looking for more details on the operating cash flow formula?read here.

Manage your company's finances with Wave, it's free.

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3. Cash Flow Forecast Formula

While FCF and OCF give you a good idea of ​​cash flow over a period of time, that's not always what you need when trying to plan ahead. Because of this, forecasting your cash flow for the next month or quarter is good practice to better understand how much cash you'll have on hand.not future.

Cash flow problems are never fun (remember, they're responsible for the vast majority of small business failures), so it's important to make sure you're cash flow positive before you start spending.

(Video) Chapter 2: Calculating Operating Cash Flows


To calculate your cash flow forecast:

They areCash Flow Forecastis actually one of the easiest formulas to calculate. There are no complicated financial terms, it's just a simple calculation of the money you expect to bring in and spend (in general) over the next 30-90 days.

The formula looks like this:

Cash Flow Forecast = Initial Cash + Forecast Inflows - Forecast Outflows = Final Cash

  • entry feeThis is, of course, the cash your company has today, and you can get that number right off your cash flow statement.
  • project inputsThey are the money you expect during the specified period. This includes current bills that are due and future bills that you expect to send and receive payments for.
  • project resultsThese are the expenses and other payments that you will make by the specified date.

Going back to our Randi example, let's assume you have:

  • Entry fee = $30,000
  • Projected input for the next 90 days = $30,000
  • Project results for the next 90 days = $4,000

Your cash flow forecast looks like this:

[30.000 US-Dollar] + [30.000 US-Dollar] – [4.000 US-Dollar] = 56.000 US-Dollar

That means Randi's cash flow guidance for the next quarter is $56,000.

Want a more detailed cash forecast for the next quarter? Read our article to walk you through the processCreate a comprehensive cash flow forecast.

Cash flow formulas: math to manage your cash flow

As a small business owner, calculating cash flow formulas may not be what excites you, but running out of cash is not a problem every entrepreneur wants to face.

Tracking cash flow in and out of your business means you have a more holistic understanding of your business' financial health. You can anticipate and solve cash flow problems before they arise, and you can streamline your operations so cash flow problems are a thing of the past.

If you need more help on the cash flow formula, visit ourCash Flow Education Center.

(Video) How to Read a Cash Flow Statement - With Free Cash flow Formula

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