What Is Cash Flow Formula and How to Calculate It?
Table of Contents
- What Is Cash Flow Formula?
- Important Cash Flow Formulas to Know About
- 1. How To Calculate Net Cash Flow?
- 2. How To Calculate Operating Cash Flow?
- 3. How to Calculate Cash Flow From Financing Activities
- 4. How to Calculate Cash Flow From Investing Activities
- 5. How to Calculate Free Cash Flow
- 6. How to Calculate Cash Flow Forecast?
- 7. How to Calculate Discounted Cash Flow?
- Final Thoughts
Cash flow formulas help you measure the amount of cash moving in and out of your business.
To calculate cash flow, subtract your business’s cash outflows from its inflows using the net cash flow formula:
Cash Inflows – Cash Outflows = Net Cash Flow
Understanding the cash flow formula is essential for freelancers, startups, and growing businesses. This guide breaks down every key cash flow type, formula, and how to use them. We’ve included examples, charts, and links to tools like Excel or QuickBooks.
What Is Cash Flow Formula?
A cash flow formula is a mathematical equation that helps you track money movement in your business. These formulas show how much cash comes in (inflows) and goes out (outflows) during a specific time period.
Cash flow is different from profit. Profit looks at revenue minus expenses on paper, but cash flow tracks actual money moving through your bank account. You can be profitable on your income statement but still have negative cash flow if customers haven’t paid their invoices yet.
Why Cash Flow Formulas Matter
Understanding cash flow helps you:
- Plan for the future – Know when you’ll have enough money for expenses
- Make smart decisions – Decide when to invest in equipment or hire staff
- Avoid cash shortages – Prevent situations where you can’t pay bills
- Track business health – See if your business is generating positive cash movement
According to the U.S. Chamber of Commerce, cash flow problems are one of the top reasons small businesses fail. Using the right cash flow formula helps you stay ahead of potential issues.
Many businesses use accounting software like Invoice Fly to automatically calculate these formulas. However, understanding the math behind them helps you make better financial decisions.
Important Cash Flow Formulas to Know About
There are seven main types of cash flow calculations that every business owner should understand. Each formula serves a different purpose and gives you unique insights into your company’s financial health.
The Seven Essential Cash Flow Formulas:
- Net Cash Flow – Overall cash movement
- Operating Cash Flow – Cash from daily operations
- Cash Flow From Financing – Cash from loans and investments
- Cash Flow From Investing – Cash from buying/selling assets
- Free Cash Flow – Cash available after expenses
- Cash Flow Forecast – Predicted future cash movement
- Discounted Cash Flow (DCF) – Present value of future cash flows
Each formula uses different components from your financial statements. Most pull data from your cash flow statement, income statement, and balance sheet.
1. How To Calculate Net Cash Flow?
Net cash flow is the simplest and most important cash flow formula. It shows whether your business generated or used cash during a specific period.
Net Cash Flow Formula
Net Cash Flow = Cash Inflows – Cash Outflows
| Component | Description | Examples |
| Cash Inflows | Money coming into your business | Customer payments, loan proceeds, investment income |
| Cash Outflows | Money leaving your business | Rent, salaries, supplier payments, loan payments |
| Net Cash Flow | The difference between inflows and outflows | Positive = cash generated, Negative = cash used |
Example:
Maria’s consulting business had $15,050 in inflows and $10,800 in outflows in January.
Calculation: $15,050 – $10,800 = $4,250
Maria generated $4,250 in net cash flow.
Who is Net Cash Flow best suited for?
Net cash flow works for every business type:
- Freelancers tracking monthly income and expenses
- Small businesses monitoring overall cash movement
- Startups ensuring they have enough money to operate
- Real estate investors tracking property cash flow (tip: CFI’s real estate cash flow modeling is a useful guide)
What does the Net Cash Flow formula tell you?
Positive net cash flow means your business is generating more cash than it’s spending. This is good for growth and stability.
Negative net cash flow means you’re spending more than you’re bringing in. This isn’t always bad – it might mean you’re investing in growth – but you need enough reserves to cover the difference.
2. How To Calculate Operating Cash Flow?
Operating cash flow measures cash generated from your core business activities. It excludes financing and investing activities to show how well your main operations generate cash.
Operating Cash Flow Formula
There are two methods to calculate operating cash flow: the direct method and indirect method.
Direct Method: Operating Cash Flow = Cash Receipts from Operations – Cash Payments for Operations
Indirect Method (most common): Operating Cash Flow = Net Income + Depreciation + Changes in Working Capital
| Component | Description |
| Net Income | Profit from your income statement |
| Depreciation | Non-cash expense added back |
| Working Capital Changes | Changes in accounts receivable, inventory, accounts payable |
Example:
Tech Solutions Inc.
- Net Income: $50,000
- Depreciation: $10,000
- Changes in Working Capital: -$5,000 + $3,000 + $2,000 = $0
Calculation: $50,000 + $10,000 + $0 = $60,000
Who is Operating Cash Flow best suited for?
- Established businesses wanting to measure operational efficiency
- Investors evaluating company performance
- Lenders assessing loan repayment ability
- Management tracking core business health
What does the Operating Cash Flow formula tell you?
Strong operating cash flow indicates your core business generates good cash flow. This is more reliable than just looking at net income because it accounts for timing differences between sales and cash collection.
Weak operating cash flow might signal problems with collections, inventory management, or the underlying business model.
3. How to Calculate Cash Flow From Financing Activities
This formula tracks cash movement from borrowing, repaying loans, issuing stock, or paying dividends.
Cash Flow From Financing Activities Formula
Cash Flow From Financing = Cash from Borrowing + Cash from Equity – Loan Repayments – Dividend Payments
| Activity Type | Cash Inflow (+) | Cash Outflow (-) |
| Borrowing | New loans, credit lines | Loan principal repayments |
| Equity | Investment from owners | Dividend payments to owners |
| Stock | Issuing new shares | Buying back shares |
Example (Restaurant Owner Sarah):
- Loan: $25,000
- Owner investment: $10,000
- Loan repayments: $8,000
- Dividends: $5,000
Calculation: $35,000 – $13,000 = $22,000
Who is Cash Flow from Financing Activities best suited for?
- Growing businesses tracking funding sources
- Investors understanding how companies finance operations
- Business owners planning debt and equity structure
- Lenders evaluating borrowing patterns
What does the Cash Flow from Financing Activities formula tell you?
Positive financing cash flow often indicates growth phase – companies borrowing or raising money for expansion.
Negative financing cash flow might mean mature companies paying down debt or returning money to owners through dividends.
4. How to Calculate Cash Flow From Investing Activities
This measures cash spent on or received from buying and selling long-term assets.
Cash Flow From Investing Activities Formula
Cash Flow From Investing = Cash from Asset Sales – Cash for Asset Purchases – Cash for Investments
| Activity | Cash Inflow (+) | Cash Outflow (-) |
| Equipment | Selling old equipment | Buying new equipment |
| Property | Selling real estate | Purchasing property |
| Investments | Selling securities | Buying stocks/bonds |
Example (Company ABC):
- Sold equipment: $5,000
- Bought machinery & computers: $58,000
Calculation: $5,000 – $58,000 = –$53,000
Who is Cash Flow From Investing Activities best suited for?
- Manufacturing businesses tracking equipment investments
- Real estate companies monitoring property transactions
- Technology companies investing in equipment and software
- Investment firms managing asset portfolios
What does the Cash Flow From Investing Activities formula tell you?
Negative investing cash flow usually indicates growth – companies investing in future capacity.
Positive investing cash flow might mean companies selling assets, which could signal downsizing or generating cash for other needs.
5. How to Calculate Free Cash Flow
Free cash flow (FCF) shows how much cash your business generates after accounting for capital expenditures needed to maintain operations.
Formula:
Free Cash Flow = Operating Cash Flow – Capital Expenditures
Alternative formula: FCF = EBITDA – Taxes – Capital Expenditures – Change in Working Capital
| Component | Description |
| Operating Cash Flow | Cash from daily operations |
| Capital Expenditures | Money spent on equipment, property, etc. |
| EBITDA | Earnings before interest, taxes, depreciation, amortization |
Example (Software Company XYZ):
Operating Cash Flow: $100,000
CapEx: $15,000
Calculation: $100,000 – $15,000 = $85,000 FCF
Who is Free Cash Flow best suited for?
- Investors evaluating investment attractiveness
- Business owners planning distributions or reinvestment
- Analysts comparing companies across industries
- Mature businesses with predictable capital needs
What does the Free Cash Flow formula tell you?
Strong FCF indicates a business generates plenty of cash beyond what’s needed for maintenance and growth. This cash can be used for:
- Paying dividends
- Buying back stock
- Reducing debt
- Making acquisitions
- Building cash reserves
Weak or negative FCF might indicate heavy investment periods or operational challenges.
6. How to Calculate Cash Flow Forecast?
A cash flow forecast predicts future cash inflows and outflows to help with planning and decision-making.
Cash Flow Forecast Formula
Forecasted Cash Flow = Beginning Cash + Projected Inflows – Projected Outflows
For monthly forecasting: Month-End Cash = Month-Start Cash + Monthly Inflows – Monthly Outflows
Example (Retail Store):
Start of Month Cash: $10,000
Projected Inflows: $25,000
Expenses: $22,000
Calculation: $10,000 + $25,000 – $22,000 = $13,000
Who is the Cash Flow Forecast best suited for?
- All businesses for planning purposes
- Seasonal businesses preparing for slow periods
- Growing companies ensuring adequate funding
- Startups managing limited cash resources
What does the Cash Flow Forecast formula tell you?
Cash flow forecasting helps you:
- Identify potential cash shortfalls before they happen
- Plan major purchases when cash is available
- Negotiate payment terms with suppliers and customers
- Decide when to seek financing if needed
Forecasting helps you manage future ledger balance and avoid cash shortfalls. Many businesses use rolling 13-week forecasts in Excel.
7. How to Calculate Discounted Cash Flow?
Discounted cash flow (DCF) calculates the present value of future cash flows, accounting for the time value of money.
Discounted Cash Flow Formula
DCF = CF1/(1+r)^1 + CF2/(1+r)^2 + … + CFn/(1+r)^n
For a single future cash flow: Present Value = Future Cash Flow / (1 + discount rate)^number of periods
| Component | Description |
| CF | Cash flow for each period |
| r | Discount rate (required return) |
| n | Number of periods |
Example:
- Year 1: $10,000 → PV = $9,091
- Year 2: $12,000 → PV = $9,917
- Year 3: $15,000 → PV = $11,270
Total DCF = $30,278
Who is the Discounted Cash Flow best suited for?
- Investors valuing businesses or investments
- Real estate professionals evaluating properties
- Corporate finance teams making capital allocation decisions
- Business owners considering major investments
What does the Discounted Cash Flow formula tell you?
DCF analysis helps you determine if an investment is worthwhile by comparing the present value of future benefits to the initial cost.
- If DCF > Initial Investment: The investment may be profitable
- If DCF < Initial Investment: The investment may not meet return requirements
For more help with DCF, the Corporate Finance Institute’s DCF Model template is an excellent resource used in engineering economics, corporate valuation, and finance classes.
Final Thoughts
Understanding cash flow formulas is crucial for any business owner or finance professional. Each formula serves a specific purpose. Some are for daily operations, others help with financial projections or long-term investments.
The key takeaways:
- Cash flow ≠ profit – cash flow tracks real money movement
- Use different formulas for different business questions
- Monitor regularly to prevent shortages
- Forecast ahead to plan with confidence
Need simpler finances? Try InvoiceFly’s Invoice Maker — It’s free!
Whether you’re managing financial projections, tracking your ledger balance, or understanding gross profit vs. net profit, these formulas give you the tools to succeed.
For businesses with unpaid invoices, understanding bad debt calculation is crucial. Free tools like invoice templates and break-even point calculators can also help you improve cash flow.
Ready to improve your cash flow? Start with professional invoicing.