How to Calculate Cash Flow: Formula

You can analyze the potential effectiveness of investment projects and the financial and economic activities of a firm or enterprise by examining information about the movement of money in them. It is important to understand the structure of cash flows, their size and direction, and their distribution over time. In order to perform this analysis, you need to know how to calculate it using the cash flow formula.

Free cash flow formula

Accountants often ask, “How to calculate cash flow?”. The choice of calculation method depends on how deeply you want to analyze the company’s cash flows and based on what data the indicator is calculated (historical or forecast).

The simplest method is designed for the initial assessment of the company’s cash flow based on actual data and using the following cash flow formula:

FCF = Net cash flows from operating activities — capital expenditures (CapEx).

That is, we deduct capital expenditures for maintaining or expanding production from the money received during the period from the main activity.

Please note that other methods are based on the actual income taxes paid, which are reflected in the company’s cash flow statement. This is because the FCF shows the real money that remains in the company’s account, while the paid and paper taxes can diverge several times. Thus, the free cash flow formula is really simple. 

How to Calculate Cash Flow: Formula

Operating cash flow formula

Operating cash flow formula is represented the following way:

OCF = EBIT + DA-T, where: EBIT – profit from the main activity, i.e., the amount of the company’s profit before taxes and interest; DA – deductions for depreciation and amortization; T – the amount of income tax. This is operating cash flow formula. 

The way financial management and accounting view cash flow from internal activities differ. In accounting, OCF is considered as the amount of depreciation and net profit, while in financial management, interest is also deducted for the use of credit resources.

Cash flow forecast formula

Companies plan cash flows from operating, investment, and financial activities for the year, broken down by months, and for operational management – for a shorter period of time. If a positive cash balance is projected over a fairly long period of time, then you should consider ways to use it profitably. In some periods, there may be a shortage of cash. Then, you need to plan for backup resources. Actual data for cash flow forecast formula is obtained from accounting data and cash flow statements.

Both the deficit and the excess of monetary resources negatively affect the financial condition of the enterprise. With excess cash flow, the real value of temporarily available cash is lost as a result of inflation, part of the potential income from underutilization of cash and operating or investment activities is lost, and capital turnover is slowed down as a result of idle cash.

The presence of excess cash flow over a long period of time may be the result of improper use of working capital. In order for money to work for the company, it is necessary to put it into circulation to make a profit: to expand its production, circulate them in the working capital cycle; to update fixed assets, acquire new technologies; to invest in profitable projects of other economic entities in order to obtain profitable interest; to repay bank loans and other obligations ahead of time to reduce debt servicing costs, etc.