• How to calculate cash flow
• How to calculate net cash flow
• How to calculate operating cash flow
• How to calculate free cash flow
• How to calculate cash flow forecasting
• Mastering cash flow to grow your business
• FAQ

Many small business owners in Canada struggle to manage cash flow, with 60% reporting challenges in this area of bookkeeping. Yet understanding and managing cash flow is vital to thrive in a competitive environment. 

This article will explain five cash flow formulas that every small business owner should learn to manage their finances effectively, ensure smooth operations, and attract potential investors. 

Here are the formulas we will walk you through: 

• Cash flow
• Net cash flow
• Operating cash flow
• Free cash flow 
• Cash flow forecasting

Mastering these fundamental accounting formulas can help you get a clearer picture of your business’s financial health and prepare for future growth.

1. How to calculate cash flow 

Knowing your cash flow is important because it ensures that your business can pay for operating expenses and capital expenditures. Being cash flow positive allows you to pay bills and invest in the company’s growth, whereas being cash flow negative can cause financial stress for business owners.

Cash flow formula 

To calculate your cash flow, you need to know your operating cash flow, investing cash flow, and financing cash flow. You can determine these numbers by referring to your cash flow statement. 

Cash flow = cash from operating activities + cash from investing activities + cash from financing activities

Cash flow example 

Here’s how this formula would work for a fitness facility with the following statement of cash:

• Operating activities (gym memberships) = $80,000
• Investing activities (purchasing new gym equipment) = $12,000 
• Financing activities (paying down a loan) = $7,500  

Cash flow ($99,500) = cash from operating activities ($80,000) + cash from investing activities ($12,000) + cash from financing activities ($7,500)

Thus, the fitness facility's cash flow is $99,500, which gives it the opportunity to pay down debt and expand the business. 

2. How to calculate net cash flow 

Net cash flow represents the difference between a business's cash inflows and outflows after covering all operating costs and debt payments.

It is different from net income, as net income covers all expenses, not just operating activities.

Net cash flow formula 

You can calculate net cash flow to determine your company’s cash balance. You can also compare it to past periods to assess your current financial position.

There are two ways to use the net cash flow formula:

Net cash flow = total cash inflows – total cash outflows

or

Net cash flow = net operating cash flow + net investing cash flow + net financing cash flow

If the total is positive, that means you have more money flowing in than going out for a specific time period.

However, if the total is negative, it means your cash is exiting quicker than it is entering the business.

Net cash flow example

For example, a hair salon has a total cash inflow of $50,000 and a total cash outflow of $30,000. 

Net cash flow ($20,000) = total cash inflows ($50,000) - total cash outflows ($30,000)

Therefore, its net cash flow comes to $20,000, which means it is in a healthy financial state.

3. How to calculate operating cash flow

Operating cash flow (OCF) provides an overview of a company’s ability to generate cash from its daily operations. Revenue generated by selling goods or services and payments of operating expenses (such as rent and utilities) makes up the cash flow from your business's operations.

Operating cash flow formula 

Understanding the cash flow from operations can help your business determine how best to use the money for both short-term and long-term scenarios. The operating cash flow formula is as follows:

Operating cash flow = net income + non-cash expenses – increase in working capital

You can obtain these figures in your cash flow statement.

Operating cash flow example 

To determine the operating cash flow, add the net income and non-cash expenses, then subtract the change in working capital.  

For instance, a graphic designer has generated the following amounts:  

• Net income of $125,000
• Non-cash expenses of $30,000   
• Change in working capital of $25,000   

Operating cash flow ($130,000) = net income ($125,000) + non-cash expenses ($30,000) - change in working capital ($25,000) 

As a result, the graphic designer has an operating cash flow of $130,000. 

4. How to calculate free cash flow 

Free cash flow shows the amount of cash your business earns after covering all expenses and capital expenditures.

Knowing this figure can help you decide whether you should hire more employees, purchase new equipment, pay off debt, or give back to your investors.

When a company’s free cash flow gradually grows, it typically means that increased earnings will follow. Many investors rely on this figure to determine whether a business is worth investing in.

Free cash flow formula

While there are several variations of this formula, this is the simplest one to follow: 

Free cash flow (FCF) = operating cash flow – capital expenditures

Free cash flow example 

Let’s say a dentist's office reports an operating cash flow of $500,000 on its annual cash flow statement. During the year, they also spent $200,000 on new dental equipment.

To calculate the company’s free cash flow, it would follow these steps:

Free cash flow ($300,000) = operating cash flow ($500,000) – capital expenditures ($200,000) 

Therefore, the dentist's office has a free cash flow of $300,000, which is a positive sign.

5. How to calculate cash flow forecasting 

Cash flow forecasting projects the future cash flow state. Going through this exercise can help you prepare for upcoming expenses and manage the cash you have on hand. 

By forecasting for the next month or quarter, you can create a solid action plan and have a better understanding of how much cash you'll have available. The accuracy of this figure depends on your payment methods and terms. For example, cash payments mean you receive the money immediately, whereas invoicing may cause a delay in payment.

Cash flow forecasting formula 

The cash flow forecast formula is one of the simpler calculations:

Cash flow forecast = beginning cash + projected inflows – projected outflows = ending cash

The beginning cash is the amount your business has available today. Your cash flow statement can provide that figure. 

Projected inflows refer to the cash you anticipate receiving during a specific time frame, such as invoices you expect payment for.

Projected outflows are the costs and payments you plan to make in a specific period of time.

Cash flow forecasting example 

Let’s say that a boutique clothing store owner has the following amounts:

• Beginning cash of $45,000
• Projected inflows for the upcoming quarter of $14,000
• Project outflows for the upcoming quarter of $7,000

Cash flow forecast = beginning cash ($45,000) + projected inflows ($14,000) – projected outflows ($7,000) = ending cash ($52,000)

Therefore, the clothing store has a forecasted cash flow for the next 90 days of $52,000.

Mastering cash flow to grow your business

Knowing how important cash flow is and learning how to calculate it can help bring your business to the next level.

When you start out, it may take some time to go through the formulas and interpret what they mean. But with some patience and practice, you’ll be able to grasp the knowledge of managing your day-to-day finances.  

QuickBooks offers helpful tools to streamline your cash flow and accounting processes, which can save you valuable time as a business owner. Learn more and get started with QuickBooks Online today.