Formula for cash flow: meaning, formulas and examples

Calculating cash flow is a vital part of a company’s financial analysis. It shows how much money actually comes in and goes out.

In this article, you’ll learn how to apply the formula for cash flow, which formulas and methods you can use (such as the operating and discounted cash flow methods) and you’ll see clear examples you can use straight away.

Table of contents:

What is cash flow?

Cash flow, also called cash stream, is the difference between all income and expenditure of a business over a specific period. It refers to the actual cash moving in and out. This sets cash flow apart from profit, as not every cost results in an immediate cash outflow.

Using the formula for cash flow gives you insight into liquidity: whether your organisation has enough free funds to pay bills, invest or grow.

Would you like to know more? Check our article “What is cash flow?”.

Why the formula for cash flow matters

• It shows your true financial position, separate from accounting profit.
• Lenders and investors use a cash flow analysis formula to assess repayment capacity.
• A good cash flow analysis helps you identify bottlenecks early.
• It supports decisions about investment, staff expansion or growth.

How to calculate cash flow: formulas explained

There are several ways to use a formula for cash flow. Below are the most common ones.

1. Simple formula

The basic approach is: Cash flow = net profit + depreciation

This works because depreciation is not a cash expense, so you add it back to profit. This is also referred to as the formula for net cash flow.

Example:
Net profit = £ 50,000
Depreciation = £ 10,000
Cash Flow = £ 60,000

2. Operating Cash Flow Formula

For a more refined view, use the operating cash flow formula focusing on core activities: Operating cash flow = Net profit + non‑cash costs + changes in working capital

This takes into account changes in receivables, inventory and payables.

Example:
Net profit: £ 50,000
Depreciation (non‑cash): £ 10,000
Increase in receivables: -£ 5,000
Decrease in inventory: +£ 3,000
Increase in payables: +£ 2,000

Operating Cash Flow = £ 60,000

3. Discounted cash flow (DCF) method

Often called the direct method cash flow formula or “discounted cash flow”, this approach is used mainly for valuations or investment decisions. It discounts future cash flows to present value.

Formula: DCF = CF(1+R)n + CF(1+R)n+….+ CF(1+R)n

Where:
CF = expected cash flow in year 1, 2, …, n
r = discount rate (for example 8% = 0.08
n = number of years

Example:
Year 1: £ 10,000
Year 2: £ 12,000
Year 3: £ 15,000
Discount rate: 8%

DCF = 10,000(1+0,08)1 + 12,000(1+0,08)2+ 15,000(1+0,08)3 = 9,259 + 10,296 + 11,907 = £ 31,462

This can also be used as an incremental cash flow formula when comparing investment alternatives.

4. Investment cash flow

Investment cash flow shows how much money flows in or out through investments like machinery or property.
Formula: Investment cash flow = proceeds from divestments – investment expenses

Example:
Sell old equipment: £ 5,000
Buy new machine: £ 20,000
Investment Cash Flow = -£ 15,000
A negative value is normal during growth if liquidity remains sufficient.

5. Financing (equity) cash flow

This shows how your business is financed: with equity, loans or dividends. This section also reflects the equity cash flow formula.

Formula: Financing cash flow = loan proceeds + share issuance – repayments – dividends

Example:
Receive a loan: £ 30,000
Repay loan: £ 5,000
Pay dividends: £ 3,000

Financing cash flow = £ 22,000

6. Free cash flow

Free cash flow is what remains after subtracting investment spending from operating cash flow. It can be seen as your total net cash flow formula for available funds for dividends, debt repayment or reinvestment.

Formula: Free cash flow = operating cash flow – investment spending

Example:
Operating cash flow: £ 60,000
Investments: £ 20,000
Free cash flow = £ 40,000

Regularly using the formula for cash flow to check your free cash flow tells you how much room you have for growth or strategic moves.

What is a good cash flow?

A good cash flow means more money coming in than going out — a positive net cash flow. How much is “good” depends on your business type, sector and growth phase:

• A start‑up may have negative cash flow temporarily due to high investments.
• A healthy, stable business aims for a structurally positive operating cash flow formula outcome.

As a rule of thumb, your cash flow should be sufficient to cover fixed costs, investments and unexpected expenses.

Tips & pitfalls when using a formula for cash flow

• Attribute changes in working capital (receivables, inventory) correctly.
• Don’t confuse non‑cash items like depreciation with actual spending.
• The discounted or cash flow from operations ratio formula requires realistic assumptions about growth and discount rate.
• Run multiple scenarios (best case / worst case).
• Always define the period when you apply the formula for cash flow—monthly, quarterly or annually—for a realistic picture.

How Payt strengthens your cash flow

One of the biggest factors influencing your cash flow is when customers pay their invoices. With Payt’s software you automate your accounts receivable management, so invoices are paid faster and more consistently. By keeping control over outstanding items, you avoid surprises and gain the insights you need to act in time.

Curious what Payt can do for you? Download our brochure or book a demo.