How to Calculate Cash Flow for Your Business

First Republic Bank
November 22, 2021

Cash flow helps business owners get a clearer financial picture of the money coming in and going out of their business at any given time. You can think of cash flow as the lifeblood of your business: it keeps the lights on, the bills paid and it helps you know if you’re operating with liquid income in the bank. Cash flow differs from profit and loss statements because it demonstrates how money moves in a shorter period of time.

There are several ways to calculate cash flow depending on what you need to know and how you plan to use your cash flow reports. Tracking cash flow can help you understand the way money moves through your business and may even help you reduce expenses.

Why calculate cash flow?

There are a variety of reasons why you might want to calculate your business’s cash flow. With robust cash flow reporting, you can:

  • Demonstrate profitability
  • Support business expansion
  • Improve your chances of receiving a business loan
  • Ensure ability to pay for expenses
  • Improve cash management

Other kinds of financial reporting, such as profit and loss statements, balance sheets and income statements, provide different insights into your company’s money. When you measure your cash flow, you measure important factors about your business’s underlying liquidity. Cash flow statements are different from profit and loss statements because they demonstrate your solvency during a certain period of time — typically from week to week or month to month. Each of these reports (and others) complements one another and helps you get a fuller picture of how money flows through your operation.

Cash flow formulas

There are several ways to measure your cash flow depending on which aspect of your business finances you’re tracking. Some are straightforward, while others are more complex. Your current cash flow is easier to calculate than your future cash flow, for example. The former provides you with numbers based on existing conditions; the latter can’t account for all possible scenarios that might impact your finances.

If you want a simple understanding of the money coming in and going out of your business, a straightforward formula should be all you need. More specific information will take a bit more math, but a basic monthly cash flow formula includes: 

  • Starting capital
  • Cash coming into the business (cash inflow)
  • Cash going out of the business (cash outflow)
  • Your ending balance 

For instance, a monthly cash flow statement would start with the capital on hand at the end of the preceding month. From there, you would add the money made during the month being measured, but subtracted by the money that leaves during the course of the month. What you’re left with helps you better understand what you’re making and spending and thus what the flow of cash looks like in your company.

This is just the beginning, however. Here are a few more complex methods of calculating cash flow for specific objectives.

Free cash flow

Free cash flow, also known as free cash flow for the firm, measures the degree to which your company’s operating cash flow exceeds your working capital and expenses. This helps indicate how much money you can pull from the company to pay back creditors, investors or reinvest in the business. Here’s how to calculate free cash flow:

Free Cash Flow = Current Operating Cash Flow − Capital Investment Expenditures

Operating cash flow

Operating cash flow helps you demonstrate your business’s earnings from normal business operations during a set period of time. This calculation tallies your revenue minus costs, taxes, and interest paid on debts. Here’s how to calculate operating cash flow: 

Operating Cash Flow = Net Income + Depreciation & Amortization + Other Income − Net Increase in Working Capital

Available cash flow

Available cash flow helps determine how much liquidity is available for investors, owners and creditors to access without potentially affecting the company’s daily operations. This calculates earnings before interest, taxes, depreciation and amortization (commonly known as EBITDA). Here’s how to calculate available cash flow:

Available Cash Flow = Net Income From Operations + Interest + Amortization & Depreciation

Cash flow forecast

So far, we’ve covered cash flow calculations for the present. But a cash flow forecast helps determine your future cash flow during a certain period of time. You might want to tally your available cash flow to help anticipate expenditures, determine when to repay creditors and investors or finance new initiatives, such as expansion or renovation. Here’s how to calculate available cash flow:

Forecasted Ending Cash = Beginning Cash + Projected Incoming Cash – Projected Outgoing Cash

Creating cash flow statements

​​Now that you know your options for calculating cash flow, you’ll want to put together cash flow statements. Cash flow financial statements help you put together data points to reveal trends, demonstrate financial circumstances, or merely keep track of where your money is coming and going. 

A standard cash flow statement consists of three main components:

1. Operating activities: Shows cash generated by operating activities (i.e., business as usual) 

2. Investing activities: Shows cash put into investing activities (e.g., purchased assets, sold securities or assets)

3. Financing activities: Shows cash put into financing activities (i.e., money spent repaying loans, loan interest, creditors, investors, or principals)

Each of these three cash flow statement sections details different financial activities within a business that may not otherwise be reflected in other reports, such as a profit and loss statement. This helps provide you and others with a complete picture of your company’s financial activities and condition.

Choose what’s best for your business

Whether you’re creating your first cash flow calculation ever or merely need to calculate a new kind of cash flow for the first time, take time to get your bearings straight before diving in. With many different ways — and reasons — to calculate cash flow, it’s best to consider your unique needs before getting carried away. 

There isn’t a one-size-fits-all process for calculating cash flow. The one you choose depends on the information you want, such as forecasting future growth, business planning, pinning down earnings or uncovering opportunities for more investments. Ultimately, it’s up to you to determine which cash flow calculation makes the most sense. Whichever route you take, it’s critical to determine your company's cash flow, as it can be a powerful tool for financial mapping and detailing the well-being and potential of your business.

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First Republic does not provide tax or legal advice. Clients should consult their own attorneys or other tax advisors.