3 cash flow formulas with examples

Cash Flow Formulas With Examples

How Can You Calculate a Cash Flow

A cash flow statement is not very confusing in theory; it merely reflects how your money inflows and outflows in your enterprise. But for small entrepreneurs, it is hard to analyze how to calculate cash flow statements; it is not easy to compute cash flow formulas as it is dissimilar to working out the income and the expenses; it is much deeper than that.

For small scale entrepreneurs and business owners, cash flow is the essential element for running a business.

Let's understand 3 major cash flow formulas: free cash flow formula, operating cash flow formula and cash flow forecast formula with examples.

3 cash flow formulas

3 Cash Flow Formulas

  • Free Cash Flow = Net Income + Depreciation/ Amortization - Change In The Work Capital - Capital Expenditure
  • Operating Cash Flow = Operating Income + Depreciation - Taxes + Change In Working Capital
  • Cash Flow Forecast = Beginning Cash + Projected Inflows - Projected Outflows = Ending Cash

Every person in business needs to understand cash flow statement formulas and its importance for their company's growth. The cash flow formulas mentioned above make it more comfortable for a business owner to picture its financial inflows and outflows. 

1. Free cash flow formula

Free Cash Flow Formula (FCF) is the most general and vital cash flow formula.

This formula provides you a reflection of your company's funds at a particular time. Still, it does not reflect the actual finances available to you, so it does not help plan the budget as it will not picture the Cash available to you.

Free Cash Flow helps recognize if you can afford certain things like; what software can you afford? Can you afford to get a digital assistant when your bills are due? How many gratitude cards can you manage?

How can you calculate a free cash flow?

You must be thinking that it is quite tough to calculate the free cash flow, but it is pretty straightforward in reality.
Firstly, you need to get accounting software to create your firm's financial statements.

Let us discuss some accounting terms to calculate free cash flow formula:

  • Net Income: The remaining value you receive after deducting your firm's expenses from the entire Income or sales.
    Depreciation / Amortization: Depreciation calculates the decreased value of assets, whereas amortization is a technique to lower down the book value of loans or intangible assets with time.
  • Working Capital: The contrast between assets and liabilities is your capital used to operate your firm's daily tasks. You can compute the difference between gross assets and liabilities through the flat sheet of your company.
  • Capital Expenditure: Capital expenditure is the money spent on nonliquid assets such as land, machinery, equipment, etc.

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

We can understand this better with a free cash flow formula example:

Chloe is a web developer; she has to compute her available cash flow to recognize if it is feasible to hire a digital assistant for about twelve hours a month.

Her finances seem like:

  • Net Income : $90,000
  • Depreciation / Amortization : $100
  • Change in Working Capital: -20,000
  • Capital Expenditure : $1,500

(Saira bought a new laptop last year)

So Saira’s cash flow is depicted by :

[$90,000] + [$100] - [$20,000] - [$1,500] = $68,600

Hence, $68,500 is Chloe's available finance to reinvest back into her business.

2. Operating cash flow formula (OCF)

Free cash flow formula could be good at recording the available funds to re-establish the company. Still, it does not reveal your daily cash flow's accurate reflection because FCF does not recognize irregular earnings, expenditures, or investments.

The better alternative for the FCF is the Operating Cash Flow Formula (OCF)

How Can You Calculate Operating Cash Flow:

Like in the case of free cash flow, you will want your budget worked out; you can use operating cash flow for this.

There is one accounting term you will have to know:

Operating Income: The earning before interests, taxes, surplus, your operating profit deducted by using expenditures from the Total Income

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

Applying the Operating Cash Flow formula to the preceding example :

  • Operating Income: $95,000
  • Depreciation: $100
  • Taxation: $8,000
  • Variation in venture capital: -$11,000

[$95,000] + [$0] - [$8,000] + [-$11,000] = $76,000

Hence, in a particular year, Chloe generates a $ 76,100 cash inflow from her usual operating activities.

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3. Cash flow forecast formula

Free Cash Flow and Operating Cash Flow provide a complete picture of cash flow at a particular time, but the Cash Flow Forecast Formula gives a vision about the cash flow in the coming month.

It is an excellent practice as it allows you to determine what amount of cash flow you might have in the future.

It is very frustrating when you do not have enough funds planned out in the time of need, so it is better to forecast the available and needed funds.

How to calculate your cash flow forecast:

Cash Flow Forecast is the most comfortably calculating formula among the FCF and OCF. There are no complex accounting terms jumbled up.

It is a straightforward computation of the money you anticipate to get in and paid out in the coming thirty to ninety days.

blueprint for the cash flow forecast :

Cash Flow Forecast = Beginning Cash + projected Inflows - projected outflows = Ending Cash

Beginning Cash is the money you have in hand in your current day.

Project inflow is the money you are supposed to get during a specific time phase.

Project outflow is the expenditures you are about to make in a specific time phase.

Let us use Chloe’s example again:

  • Beginning cash: $40,000
  • Projected inflows for the coming 90 days: $40,000
  • Project outflows for the coming 90 days: 5,000

Her cash flow forecast seems like:

[$40,000] + [$40,000] - [$5,000] = $75,000

The cash flow forecast of Chloe's finances in the coming 90 days would be $75,000.

Cash flow formulas: Math to keep your money moving

It might look like a hardship to calculate all these cash flow formulas but facing a cash shortage is worse.

Keeping a record of your regular cash inflow and outflow lets you get a more comprehensive approach towards your financial statements.

With the help of these cash flow formulae, you can now solve the expected problems, and so you can also carry out your operations optimally and keep the cash flow issues in the past.

Manage your finances with eBetterBooks


We have helped startups and small business owners with their accounting needs such as a bookkeeping,
tax filing, tax preparation, financial reporting and much more.

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