Calculating cash flow can sometimes seem like a tedious task. The plethora of different concepts and formulas can be daunting at first. Nevertheless, calculating cash flows remains an excellent way to assess the financial health of a business.
Companies use cash flow formulas to calculate various variables related to cash flow. Here we give you an overview of the most important formulas and methods.
Monthly cash flow balance  = Monthly inflows  Monthly outflows 

Operating cash flow  = Net income + depreciation and amortisation + accounts receivables + inventory + accounts payables 
Investing cash flow  = Incoming investment cash flows  outgoing investment cash flows 
Financing cash flow  = Incoming financing cash flows  outgoing financing cash flows 
Net cash flow  = Operating cash flow + investing cash flow + financing cash flow 
Free cash flow  = Operating cash flow  capital expenditures 
NPV  = Net cash flow / (1+r)^t  initial investment 
Cash flow formula: Direct method
The cash flow formula according to the direct method is one way of calculating the cash flow balance so that other cash flow ratios can be determined later.
The direct method compares expenditure and income within a certain period of time. The cash flow balance is determined directly from the incoming and outgoing cash flows (cash inflows and cash outflows). The cash flow balance is often determined on a monthly basis:
Monthly cash flow balance = Monthly inflows  Monthly outflows
Incoming cash flows include, for example:
 Revenue from sales
 Cash on hand
 Cheques
 Funding and subsidies
 Loans
 Tax refunds
Outgoing cash flows include:
 Staff salaries
 Cost of materials
 Administration costs
 Marketing and distribution costs
 Rent
 Leasing fees
 Insurance premiums
 Fees for software licences
 Back tax payments
CF>0  Positive cash flow
CF=0  “Zero” cash flow
CF<0  Negative cash flow. Negative cash flow may indicate that a company needs to obtain a shortterm loan to generate enough cash to cover its monthly expenses.
Read also: How to deal with cash flow problems / issues?
Cash flow formula: Indirect method
In the indirect method, the cash flow is calculated from the key figures in the income statement by deducting all noncash expenses and income from the net profit after tax.
With the indirect method, the individual cash flows are not compared with each other as with the direct method. All noncash items are eliminated from the annual result until only the cash flow remains.
Noncash expenses include, for example:
 Depreciation
 Increases in provisions
 Allocation of reserves
 Decreases in inventories of finished goods and work in progress
Nonperiod and extraordinary expenses Noncash income includes:
 Reversal of provisions
 Withdrawals from reserves
 Income unrelated to the accounting period and extraordinary income
What’s an Operating Cash Flow (OCF) formula?
With the help of the indirect method, the operating cash flow can be calculated from the cash flow statement. The following formula is used for this purpose:
 Operating cash flow = Net income + depreciation and amortisation + accounts receivables + inventory + accounts payables
The operating cash flow only takes into account the amount of cash that arises from or has to be spent on operating activities. Investment and financing activities are not included.
Investing cash flow formula
The cash used for investment activities or generated by investments is called investing cash flow:
Investing cash flow = Incoming investment cash flows  outgoing investment cash flows
The incoming cash flows (e.g. returns or dividends from investments) are deducted from the outgoing cash flows (e.g. purchase of a new machine).
Financing cash flow formula
The cash flow from financing activities can also be presented separately by subtracting the outgoing from the incoming cash flows:
Financing cash flow = Incoming financing cash flows  outgoing financing cash flows
How to calculate Net Cash Flow? Formula
If you add up all the above cash flows, you get the net cash flow:
Net cash flow = Operating cash flow + investing cash flow + financing cash flow
To obtain the net cash at the end of a period, the net cash flow is offset against the cash flow balance of the previous period:
Net cash at end of period = Net cash flow + cash balance at start of period
For example, if the cash balance at the beginning of the year is £50,000 and the net cash flow during the current year is £30,000, the net cash balance at the end of the year is £80,000.
Free Cash Flow (FCF) formula
The free cash flow indicates the amount of cash that remains after all costs incurred in the operational area have been covered. The free cash flow analysis allows getting an accurate picture of the company’s ability to invest in its future growth. Investors use FCF to assess how much free cash a company has available for strategic investments and operational needs. The FCF formula is as follows:
Free cash flow = Operating cash flow  capital expenditures
Capital expenditures here refer to all the expenses to acquire, upgrade or extend company’s fixed assets.
Cash flow formula for NPV
The net present value (NPV) indicates the value of all future cash flows at the current time. Future interest is taken into account and related to the current point in time. In this way, it is possible, for example, to assess whether an investment at the present time will generate a positive cash flow in the future or not.
To calculate the NPV, one needs the future net cash flow. This can be estimated, for example, by preparing a cash flow forecast that takes into account all expected incoming and outgoing cash flows generated by the initial investment. The NPV can then be calculated using the following formula:
NPV = Net cash flow / (1+r)^t  initial investment
In this formula, r stands for the interest rate assumed for the future cash flows; t stands for the duration of the investment (usually in years) and initial investment is the amount invested.
Example
A company wants to know whether an investment of £500,000 in a new machine is worthwhile or whether the money should rather be invested for 5 years in the capital market, where an annual interest rate of 10% is expected. By investing in the new machine, on the other hand, the company expects an annual cash flow of £50,000. The NPV of the machine is then calculated like this:
NPV = £500,000 + £50,000/(1+0.1) + £50,000/(1+0.1)² + £50,000/(1+0.1)³ +£50,000/(1+0.1)^4 + £50,000/(1+0.1)^5Capital value = £310,461
Since the NPV is negative, the investment in the machine is not worthwhile and the investment in the capital market is the more interesting alternative.
What is NPV formula in Excel?
There is a builtin Excel formula that facilitates the calculation of NPV:
=NPV(rate, value1, [value2],...).
Rate  the interest rate that returns future cash flows to their present value.Value1, Value2  cash inflows / cash outflows for each period.
What is the most important cash flow formula in business?
Since there are many different cash flow formulas, you may be wondering which one is the most important. However, there is no general answer to this question, because it always depends on the aspect from which you want to view your cash flow.
If you want to have detailed information about your monthly cash flows because you might want to calculate the cash burn rate, it is worthwhile to determine the individual cash flows using the direct method. This is more accurate than the indirect method.
If you are only interested in your annual cash flow, you can calculate it using your cash statement and the cash flow formulas for the indirect method. This method is less accurate, but it is easier and faster to calculate the individual cash flow figures.
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Overview of Cash Flow Formulas and Methods
Calculating cash flow can be a complex task, but it is crucial for assessing the financial health of a business. There are various formulas and methods used to calculate different aspects of cash flow. Let's explore the key concepts mentioned in the article:

Monthly Cash Flow Balance: The monthly cash flow balance is calculated by subtracting monthly outflows from monthly inflows. It provides an overview of the cash flow situation on a monthly basis.

Operating Cash Flow (OCF): Operating cash flow represents the cash generated or spent on operating activities. It is calculated by adding net income, depreciation and amortization, accounts receivables, inventory, and accounts payables.

Investing Cash Flow: Investing cash flow refers to the cash used for investment activities or generated by investments. It is calculated by subtracting outgoing investment cash flows from incoming investment cash flows.

Financing Cash Flow: Financing cash flow represents the cash flow from financing activities. It can be calculated by subtracting outgoing financing cash flows from incoming financing cash flows.

Net Cash Flow: Net cash flow is the sum of operating cash flow, investing cash flow, and financing cash flow. It provides an overall picture of the cash flow situation.

Free Cash Flow (FCF): Free cash flow indicates the amount of cash remaining after covering all costs incurred in the operational area. It is calculated by subtracting capital expenditures from operating cash flow.

Net Present Value (NPV): Net present value is used to assess the value of future cash flows at the current time, taking into account future interest. It helps determine whether an investment will generate a positive cash flow in the future. The NPV formula is: NPV = Net cash flow / (1+r)^t  initial investment.
These formulas and methods provide insights into different aspects of cash flow, allowing businesses to make informed decisions about their financial health and investment opportunities.
Please note that the article also mentions the direct and indirect methods of calculating cash flow. The direct method compares expenditure and income within a certain period of time, while the indirect method calculates cash flow from key figures in the income statement by deducting noncash expenses and income from the net profit after tax.
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