Cash flow formula: Meaning, methods and examples

Calculating cash flow is an essential 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 calculate cash flow, which formulas and methods you can use (such as the operating and discounted cash flow methods) and see concrete examples you can apply right away.

Table of content:

What is cash flow?

Cash flow, also called cash stream, is the difference between all incoming and outgoing payments of a business over a set period. It’s about the actual cash moving in and out. This distinguishes cash flow from profit, since not every expense means an immediate cash outflow.

By using the cash flow formula, you gain insight into your liquidity—whether your organization has enough free funds to pay bills, invest or grow.

Want to know more? Check our article “What is cash flow?”

Why the cash flow formula matters

It gives a true picture of your financial position, separate from accounting profit.
Lenders and investors use the cash flow formula to assess repayment capacity.
A clear cash flow analysis helps you identify bottlenecks early.
It supports decisions about investments, hiring or expansion.

How to calculate cash flow: Formulas explained

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

1. Simple cash flow formula

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

Depreciation is not an actual cash expense, so you add it back to profit.

Example:
Your company has a net profit of € 50,000 and € 10,000 in depreciation.
Cash Flow = € 60,000

2. Calculate operating cash flow

For a more refined view, you can calculate operating cash flow (focusing on core activities).

Formula: Operating cash flow = net profit + non-cash costs + changes in working capital

This includes 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

This method, often called the cash flow indirect method, is used 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 (e.g., 8% = 0.08)
n = number of years

Example:
You invest in a project generating these cash flows:
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

DCF = € 31,462 (present value of all future cash flows)

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 can be normal when you’re growing, as long as liquidity stays healthy.

5. Financing cash flow

This shows how your business is financed: with equity, loans or dividends.

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

Example:

• Receive a loan: € 30,000
• Repay a 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 indicates how much money is available 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

By regularly using a cash flow formula to monitor your free cash flow, you’ll know how much financial room you have for growth or strategic moves.

What is a good cash flow?

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

• A startup may have negative cash flow temporarily due to heavy investments.
• A stable business aims for structurally positive operating cash flow.

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

Tips and pitfalls when using a cash flow formula

• Track changes in working capital (receivables, inventory, payables).
• Don’t confuse non-cash items like depreciation with real expenses.
• The discounted cash flow approach requires realistic assumptions on growth and discount rates.
• Run multiple scenarios (best case / worst case).
• Always define the time period when you apply the cash flow formula—monthly, quarterly or annually—for a reliable view.

How Payt strengthens your cash flow

One of the biggest factors affecting your cash flow is when customers pay their invoices. With Payt software you automate your credit management, ensuring invoices are paid faster and more consistently. This keeps your cash position predictable and lets you act on time.

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