There’s no doubt about it. Cash flow is one of the most important parts of a business.

When cash flow is good, you have the money to invest, grow, and profit. When cash flow is bad, you are constrained, strained, stressed, and sometimes, on the brink of shutting down. One U.S. Bank study concluded that 82% of business failures are due to poor cash management.

If your business — and you — are going to thrive, you need financial insight that can help you avoid cash flow issues. You must create a plan that provides cash-on-hand, foresight into your financial future, and financial security throughout the year.

You can accomplish that by using cash flow formulas.

What’s a Cash Flow Formula?

A cash flow formula is an equation that determines how much cash is being paid in and paid out of a business. It helps business owners see their sources of income, amount of spending, and current and projected account balances.

Business owners need a cash flow formula because it helps to:

  • Plan for upcoming expenses
  • Identify places where costs need to be cut
  • Show a realistic look at working capital
  • Create financial forecasts for short- and long-term planning

A cash flow formula is key for managing cash in a business. If you aren’t using one, here are a few options you can use.

3 Cash Flow Formulas to Know & Use

Here are three cash flow formulas that have unique benefits. If you aren’t sure which cash flow formula will help you get the insights you need, talk to a financial advisor who can guide you to the cash flow system that will provide the most benefit to your business.

1. Free Cash Flow

A widely used cash flow formula is the Free Cash Flow. It is commonly used to help businesses get an idea of the amount of cash they have available to spend.

Net Income

+ Depreciation/Amortization

– Change in Working Capital

– Capital Expenditure

= Free Cash Flow

Net income is your revenue less your business expenses. Depreciation represents the value decrease of your large business assets. Amortization is the cost of a large intangible business asset broken up over their lifetime. Working capital is total current assets less current liabilities. Finally, capital expenditure includes money spent on assets that will be used in the business for multiple years. The metrics you need for a Free Cash Flow formula will be found in your income statement or balance sheet.

2. Operating Cash Flow

While a Free Cash Flow formula can offer a high-level look at available cash, it can be easily disrupted by changes such as selling an asset. For a more accurate look at a business’s cash flow, use an Operating Cash Flow formula.

Operating Income

+ Depreciation

– Taxes

+ Change in Working Capital

= Operating Cash Flow

For this formula, you will need some of the financial metrics from the Free Cash Flow formula as well as operating income. Operating income is revenue less cost of sales minus your operating expenses. It is also called earnings before interest and taxes. Operating income is found on an income statement.

3. Cash Flow Forecast

The final cash flow formula in our list is one to use if you’d like to have a look at your cash flow over a future time period. A Cash Flow Forecast allows a business to see how much cash will be on-hand over a time period such as 30 or 90 days.

Beginning Cash

+ Projected Inflows

– Projected Outflows

= Cash Flow Forecast

Beginning cash is the amount of cash your business has today. Projected inflow represents the expected cash coming into the business, mainly coming from sales, over the time period of your report. Projected outflow represents the expected cash going out of the business, this could be expenses paid in cash, loan repayments, owner draws, etc., over the time period of your report.

How to Get Financial Metrics for Your Cash Flow Formulas

As you can see, you need a variety of financial metrics to complete a cash flow statement. If you want to get your cash flow formulas in order, it helps to have accurate bookkeeping for your business.

If you don’t currently have strong monthly accounting or booking systems, start there. The better your books and financial reporting, the more accurate your cash flow statements will be.

If you need support, talk to our team at CFO Solutions about our back office accounting and outsourced bookkeeping services to see how we can help you get the accurate reports and financial metrics you need.

Related: The 6 Essential Financial Metrics Every Business Owner Must Know

Start Using Cash Flow Formulas

While each of these cash flow formulas come with their own benefits and specific purposes, one thing is true about all of them. It’s better to use one of these cash flow formulas than nothing at all.

You cannot run your business blind.

Without clear visibility on your finances, it will be difficult to create financial forecasts, obtain credit, increase profits, and gain stability in your business.

If you are currently running your business without a clear view of your cash flow, here is a resource to get you started. 

Download this free Small Business Financial Planning Guide to get formulas to start building cash flow statements that will give you visibility into your full financial situation. Start making better, more informed short-term and long-term projections for your business. Download your free guide today.

Cash Flow Formulas

Susan Nieland