How to calculate cash flow
Posted: Mon Dec 23, 2024 9:46 am
You can calculate cash flow in a number of ways, depending on the type you're focusing on. Below we'll show you three commonly cited types, along with the cash flow formulas to calculate each one.
Operating cash flow
Companies can vary in their formulas, depending on how much detail they provide. Many large companies include a line item that accounts for their operating cash flow. But in the absence of a cash flow statement, you could use this basic formula to calculate it:
Net income + non-cash expenses - change in working capital - taxes = operating cash flow
Non-cash expenses on the income statement are added to cash flow. These expenses include depreciation of asset values and stock-based compensation to employees. The net change in working capital, which is the difference between current assets and current liabilities, is subtracted. Taxes are subtracted because they must be paid in cash.
Free cash flow
Free cash flow is how much cash you have available to work with, minus spending to maintain or improve company assets, such as factories and offices. This spending is called capital expenditure, or capex, and the free cash flow formula is:
Cash flow from operations - CAPEX = free cash flow
Free cash flow, calculated by financial analysts and canadian cell phone numbers business managers, is a key measure of a business's strength because it shows how much money it has available to use for expansion, acquisitions, paying dividends or buying back shares, or repaying debt.
It assesses how well a company can rely on its own resources without the need for external financing.
Cash flow forecast
Beginning cash balance + projected inflows - projected outflows = cash flow forecast
Projections may need to incorporate any expected changes in prices and costs over the forecast period; for example, if the company anticipates a 10% increase in the costs of its products and overheads, and plans to increase its prices by 12%. Cash flow forecasts may need ongoing monitoring and adjustment, based on how money actually flows in and out of the business.
Cash flow example
Here's a hypothetical cash flow example, based on accrual accounting versus cash accounting:
An entrepreneur with a sportswear business has seen his business grow by approximately 10 million euros in monthly sales. Expenses of 8 million euros generate a profit of 2 million euros.
But half of sales, or €5 million, are made within 30 days of payment by customers, leaving €5 million in cash sales.
Meanwhile, the entrepreneur pays 4 million euros of monthly expenses in cash, and the remaining 4 million will be paid in 30 days credit.
So, although the business profit is 2 million euros, the cash flow is half that amount:
5 million euros in cash sales - 4 million euros in cash expenses = 1 million euros
Accrual accounting is based on something called the matching principle: sales for a specific period are matched with the expenses associated with producing those sales.
So in the example above, the €10 million in sales and the €8 million in expenses are matched up in the same period, rather than just the cash portion of each in cash accounting.
Cash flow is essential for your business
You may not have imagined dealing with spreadsheets when you first started your business, but some of these processes are actually essential to success. Without a handle on your future cash flow, you could find yourself running out of money to keep your doors open.
Fortunately, there are calculators, templates, and formulas to help you master your business's cash flow and improve profitability.
Operating cash flow
Companies can vary in their formulas, depending on how much detail they provide. Many large companies include a line item that accounts for their operating cash flow. But in the absence of a cash flow statement, you could use this basic formula to calculate it:
Net income + non-cash expenses - change in working capital - taxes = operating cash flow
Non-cash expenses on the income statement are added to cash flow. These expenses include depreciation of asset values and stock-based compensation to employees. The net change in working capital, which is the difference between current assets and current liabilities, is subtracted. Taxes are subtracted because they must be paid in cash.
Free cash flow
Free cash flow is how much cash you have available to work with, minus spending to maintain or improve company assets, such as factories and offices. This spending is called capital expenditure, or capex, and the free cash flow formula is:
Cash flow from operations - CAPEX = free cash flow
Free cash flow, calculated by financial analysts and canadian cell phone numbers business managers, is a key measure of a business's strength because it shows how much money it has available to use for expansion, acquisitions, paying dividends or buying back shares, or repaying debt.
It assesses how well a company can rely on its own resources without the need for external financing.
Cash flow forecast
Beginning cash balance + projected inflows - projected outflows = cash flow forecast
Projections may need to incorporate any expected changes in prices and costs over the forecast period; for example, if the company anticipates a 10% increase in the costs of its products and overheads, and plans to increase its prices by 12%. Cash flow forecasts may need ongoing monitoring and adjustment, based on how money actually flows in and out of the business.
Cash flow example
Here's a hypothetical cash flow example, based on accrual accounting versus cash accounting:
An entrepreneur with a sportswear business has seen his business grow by approximately 10 million euros in monthly sales. Expenses of 8 million euros generate a profit of 2 million euros.
But half of sales, or €5 million, are made within 30 days of payment by customers, leaving €5 million in cash sales.
Meanwhile, the entrepreneur pays 4 million euros of monthly expenses in cash, and the remaining 4 million will be paid in 30 days credit.
So, although the business profit is 2 million euros, the cash flow is half that amount:
5 million euros in cash sales - 4 million euros in cash expenses = 1 million euros
Accrual accounting is based on something called the matching principle: sales for a specific period are matched with the expenses associated with producing those sales.
So in the example above, the €10 million in sales and the €8 million in expenses are matched up in the same period, rather than just the cash portion of each in cash accounting.
Cash flow is essential for your business
You may not have imagined dealing with spreadsheets when you first started your business, but some of these processes are actually essential to success. Without a handle on your future cash flow, you could find yourself running out of money to keep your doors open.
Fortunately, there are calculators, templates, and formulas to help you master your business's cash flow and improve profitability.