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How to Calculate Cash Flow

Updated: Dec 19, 2023

Simply put, cash flow is a reflection of how money moves into and out of your business.

For small businesses, in particular, cash flow is one of the most important components of their financial health and business owners often face challenges when managing it. Nevertheless, by taking the time to read about these three key cash flow formulas—free cash flow, cash flow from operations, and cash flow forecast—you’re on the right track to feeling more knowledgeable and confident about your business finances and controlling your cash flow statement.

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Important Cash Flow Formulas to know about:

  • 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 = Beginning Cash + Projected Inflows - Projected Outflow = Ending Cash

Free Cash Flow Formula

What Is Free Cash Flow (FCF)?

Free cash flow (FCF) is the cash a company generates after taking into consideration cash outflows that support its operations and reinvesting in non-current capital assets the company. In other words, free cash flow is the cash left over after a company pays for payroll, rent, and taxes, and a company can use it as it pleases.

Free cash flow is an important indicator since it represents how efficient a company is at generating cash. Investors use free cash flow to calculate whether a company might have enough cash for dividends or share buybacks. In addition, the more free cash flow a company has, the better it is placed to pay down debt and pursue opportunities that can enhance its operations, making it an attractive choice for investors.

Free Cash Flow Formula

Knowing how to calculate free cash flow and analyze it will help business owners manage their cumulative cash flow more effectively. Additionally, FCF calculation will give investors with insight into a company's financials, helping them make better investment decisions.


Operating Cash Flow Formula

What Is the Operating Cash Flow Formula?

Operating cash flow (OCF) is a measure of the amount of cash generated by a company's normal operating activities. Knowing your operating cash flow is a must when getting an accurate overview of your cash flow since the FCF formula doesn’t account for irregular spending, earnings, or investments.


For example, when you sell off a large asset, your cash flow would go up - but that doesn't reflect the typical cash flow for your business.

It’s important to understand what your OCF looks like before seeking funding as banks or venture capital firms are more likely to be interested in your operating cash flow.

Operating Cash Flow Formula

OCF begins with net income from the income statement then adds back any non-cash items, and adjusts for changes in net working capital, to arrive at the total cash generated or consumed in the period.

Cash Flow Forecast Formula

Both FCF and OCF formulas would give you a better idea of cash flow in a given period, but that isn’t always what you need when it comes to planning for the future. That’s when you need to calculate the cash flow forecast formula to understand how much cash you’ll have on hand in the upcoming month or quarter.

Cash Flow Forecast Formula

It’s easy to forecast your cash flow with this formula since there aren’t complex financial terms involved.


As a small business owner, you need to keep track of cash flow into and out of your cash business’s financial health to have a more holistic understanding of your business’s financial health. Forecasting your cash flow in the future is also necessary to solve the financial problems before they hit. If you need more support in keeping track of your cash flow, learn about our bookkeeping solutions here.

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