Calculating Cash Flow: Formulas, Methods & Examples

Key takeaways

• Basic cash flow formula: Cash flow = cash inflows minus cash outflows. This shows you how much money is actually flowing in or out during a given period.
• Cash flow can be calculated directly using actual cash inflows and outflows or indirectly based on net income. The indirect method adjusts for non-cash items and changes in working capital.
• The operating cash flow (OCF) shows whether your core business is self-sustaining. The free cash flow (FCF) is simply calculated as operating cash flow minus capital expenditures.
• The discounted cash flow (DCF) is not a type of cash flow, but a valuation method. It shows the present value of expected future cash flows.
• For real estate, the simplified rule is: cash flow = rental income minus non-recoverable operating costs minus debt service. Once you have multiple accounts, scenarios, or need real-time data, software is a better choice than Excel.

Why should you calculate cash flow?

Because revenue does not equal cash in the bank. A full order book is of little use if invoices are paid weeks later. Cash flow highlights exactly this gap. Current data shows just how relevant this is: 61% of small businesses worldwide struggle with cash flow issues (QuickBooks, 2019). At the same time, the payment gap in European B2B business has continued to widen: in 2026, invoices were paid on average about 20 days later than agreed (Intrum, 2026).

When you calculate cash flow, you answer three key questions: Is the core business self-sustaining? How much money is left over for investments and debt repayment? And when is a bottleneck likely to occur? We explain exactly what cash flow is and the different types of cash flow in detail in our pillar article Cash Flow: Definition, Significance, and Types. This section focuses on the actual calculations.

The Cash Flow Formula at a Glance

The basic cash flow formula is simple: subtract all cash outflows for a period from all cash inflows. In practice, there are two ways to do this: the direct method and the indirect method. Both can determine operating cash flow, but they use different source data.

Basic Cash Flow Formula

Cash Flow = Total Cash Inflows − Total Cash Outflows

Direct Method: Operating Cash Flow = Cash receipts from sales − Cash payments to suppliers, employees, and other operating expenses.

Indirect Method: Operating Cash Flow = Net income + non-cash expenses/income ± changes in working capital.

Which method you choose depends primarily on the data you have available. If you only have the annual financial statements, you will usually use the indirect method. If you have access to real-time payment data, the direct method is more accurate and practical. We will look at both in detail now.

Calculating Cash Flow Using the Indirect Method

The indirect method is frequently used in cash flow statements, particularly for cash flow from operating activities. According to DRS 21, operating cash flow can be presented directly or indirectly; however, cash flows from investing and financing activities are generally reported directly (DRSC, 2023).

With the indirect method, you start with the net income and adjust it for items that affected profit without involving an actual cash flow. You also account for changes in working capital, such as receivables, inventory, and operating liabilities. This allows you to move from accounting profit to the actual cash flow from ongoing business operations.

Indirect Method: Step-by-Step

• Start with the annual net income or net profit.
• Add back depreciation and other non-cash expenses, as they reduce profit but do not result in a cash outflow.
• Subtract non-cash income, as it increases profit but does not result in a cash inflow.
• Add increases in provisions and subtract decreases in provisions.
• Deduct increases in receivables and inventory, as these tie up cash. Decreases are added.
• Add increases in operating liabilities, as they provide short-term liquidity. Decreases are deducted.

Example: calculating using the indirect method

A company reports an annual net income of €150,000 . Added to this are depreciation charges of €50,000. At the same time, trade receivables have increased by €20,000 because customers paid later.

The operating cash flow is therefore €180,000. Depreciation is added back because, while it reduces profit, it does not result in an outflow of cash. The increase in receivables is deducted because that money is still with the customer. This example shows why cash flow and profit can diverge.

Calculating cash flow using the direct method

The direct method compares the actual cash inflows and outflows of a period directly, without starting from the annual net income. The result is highly transparent, but it requires accurate, up-to-date payment data. For this reason, it is primarily used internally for ongoing management.

Typical inflows and outflows:

• Inflows: Revenue from product and service sales as well as the settlement of outstanding receivables.
• Outflows: Wages and salaries, supplier invoices, rent, taxes, and other ongoing operating costs.

Example: calculating using the direct method

A company receives €500,000 in sales in one month and pays €300,000 for materials, wages, and operating expenses.

The operating cash flow is €200,000. The advantage: You can immediately see which cash flows are driving the result. The disadvantage: The method is only as good as the data quality in your accounting.

Direct vs. indirect method compared

Calculating operating cash flow

Operating cash flow (OCF) is the cash flow from day-to-day core business operations and is one of the most important cash flow metrics. It shows whether the business model is self-sustaining. It can often be calculated indirectly from the net income by accounting for non-cash items and changes in working capital.

Formula: operating cash flow (indirect)

OCF = Net income + Depreciation + Increase in provisions − Increase in receivables − Increase in inventory + Increase in operating liabilities

A worked example with several adjustment items:

The operating cash flow is therefore €130,000. Depreciation and the increase in provisions are added because they reduce profit but do not cause an immediate cash outflow. Rising receivables and inventory are deducted because they tie up capital.

Gross and net cash flow: before or after tax?

Whether cash flow is viewed before or after tax depends on the chosen definition and calculation. For liquidity planning, it is crucial to know which taxes were actually paid, as these are real cash outflows. Therefore, in practice, you should always check whether your cash flow calculation already accounts for income taxes paid or if you need to deduct them separately.

If you would like to include paid income taxes of €30,000 in the example, the simplified result is:

Operating cash flow after taxes = €130,000 − €30,000 = €100,000

This is not an additional type of cash flow, but rather a view of the same figure before or after tax payments.

Calculating Free Cash Flow

The free cash flow (FCF) shows how much cash remains available after ongoing business operations and the deduction of investments in fixed assets. It can be used to pay off debt, pay dividends, build reserves, or finance further growth. This makes it an important indicator of financial flexibility and a key foundation for company valuation.

Formula: Free Cash Flow

Free Cash Flow = Operating Cash Flow − Capital Expenditures (CapEx)

Example: The operating cash flow is €130,000. During the same period, the company invests €50,000 in a new machine.

This leaves €80,000 freely available. A stable or growing FCF is considered a sign of sound corporate management. A negative FCF is normal during growth phases, but it should be intentionally planned. For young companies, the following metric is also relevant in this context: Burn Rate and Cash Runway relevant.

Calculating Discounted Cash Flow (DCF)

The Discounted Cash Flow (DCF) is not a type of cash flow itself, but rather a valuation method. The discounted cash flow method is used to determine the present value of future cash flows (Gabler Wirtschaftslexikon). In other words, it answers the question of what expected cash flows are worth today.

The core concept: money received in a few years is worth less today than money available immediately. Therefore, future cash flows are discounted to their present value using an interest rate.

Formula: Discounted Cash Flow

DCF = Σ [ Free Cash Flow in year t / (1 + i)^t ]

i = discount rate or cost of capital
t = year
Σ = sum over all years

DCF example: is a new production facility worth it?

A mid-sized home appliance manufacturer is evaluating a new production facility. The investment costs €5 million and has a lifespan of 10 years. An annual free cash flow of €1.8 million is expected, for example through additional cash-effective earnings and cost savings. The discount rate is 8%.

Each future cash flow is now discounted to its present value. The first few years illustrate the principle:

Over 10 years, the discounted cash flows add up to approximately €12.08 million (present value annuity factor 6.71 × €1.8 million). Since this present value is significantly higher than the investment cost of €5 million € is, the net present value is positive:

Net present value = €12.08 million − €5 million = €7.08 million

The investment is therefore financially attractive.

Further DCF use cases

The same logic can be applied to a wide variety of investments. It is always a matter of discounting future cash flows and comparing them with the investment costs:

• E-commerce, new warehouse and logistics center: expected cash flows from lower shipping costs, higher sales due to shorter delivery times, and fewer returns. Discounting shows whether the expansion pays off. Read more in our solutions for e-commerce.
• Marketing agency, automation software: expected cash flows from less time spent per project, potential new clients, and better customer retention. DCF makes profitability visible. See our solutions for agencies for more on this.

Calculating cash flow for real estate

In real estate, cash flow measures how much money a rented property actually generates after operating costs and debt service. It is a key indicator of whether a property pays for itself through current income or whether you have to contribute money monthly.

Formula: Real estate cash flow (pre-tax)

Cash flow = Rental income − non-recoverable operating costs − debt service (interest + repayment)

Example for a rented condominium, annual figures:

The property generates a positive cash flow of €7,000 per year. A positive value means that the property pays for itself from a cash flow perspective. A negative value—often referred to as a subsidized property—can still be worthwhile if value appreciation or tax effects compensate for it. However, it must be financed deliberately.

Cash flow calculation in Excel

For individual properties or simple structures, a spreadsheet is often sufficient. In Excel, you create an entry for each item, such as receipts and disbursements, and sum them up at the end. A ready-made Excel template for liquidity planning handles the setup for you.

Excel is cost-effective and flexible, but it hits its limits as soon as multiple accounts, scenarios, or daily data come into play. At that point, the manual maintenance effort increases significantly, and errors creep in more easily.

Calculating cash flow with software

As soon as your company grows, manual calculation becomes a burden. Nevertheless, 72% of treasury managers still create their cash flow forecasts manually (PYMNTS, 2022), which is time-consuming and prone to errors. Software automates the calculation, connects bank accounts, and provides a real-time picture instead of just a look into the past.

Practical tip from daily finance

“Knowing the formula is one thing. In practice, it usually fails due to the ongoing maintenance of figures across multiple accounts.” A tool like Tidely connects your bank accounts, automatically categorizes payments, and delivers your first cash flow forecast in about 15 minutes, including a 13-week plan with a single click. This turns a one-time calculation into ongoing management.

The greatest added value lies in scenario analysis: You can see immediately how an investment, a drop in sales, or a late payment affects your cash flow. We show how this works methodically in our article on scenario planning and forecasting. 

Automation is also gaining importance in cash managementThe 2025 PYMNTS Intelligence Time-to-Cash report shows that digital workflows, automation, and AI-powered forecasting significantly accelerate cash flow processes; 71% of surveyed companies report improvements in their cash flow (PYMNTS Intelligence, 2025).

Cash flow calculator: calculate it yourself quickly

A simple calculator is enough for an initial assessment. Enter your cash inflows and outflows to get the cash flow for the period. For operating cash flow, use the indirect formula: net income plus non-cash items, adjusted for changes in working capital. For free cash flow, subtract capital expenditures.

Quick formulas for manual calculation

1. Simple cash flow: Cash inflows − Cash outflows
2. Operating cash flow: Net income + depreciation ± changes in working capital
3. Free cash flow: Operating cash flow − capital expenditures

Conclusion: calculate and actively manage your cash flow

Calculating cash flow isn't about complex math; it's about using the right formula and accurate figures. The indirect method is best for deriving figures from financial statements, while the direct method is ideal for ongoing management. Free cash flow can be derived from operating cash flow; for investment decisions, future free cash flows can also be evaluated using the discounted cash flow method.

The key is to turn a one-off calculation into an ongoing practice. By calculating your cash flow regularly and planning for the future, you can identify bottlenecks early and make investment decisions based on reliable data. For a deeper understanding of these concepts, see our pillar article on cash flow as well as our guide to liquidity planning.

Frequently asked questions about calculating cash flow (FAQ)

How do you calculate cash flow?

The basic principle is: Cash flow = Cash inflows − Cash outflows. In practice, you calculate cash flow either directly from actual cash flows or indirectly from net income, adjusted for non-cash items and changes in working capital.

What is the difference between the direct and indirect cash flow calculation methods?

The direct method compares actual cash inflows and outflows. The indirect method starts with net income and adjusts it for depreciation, provisions, and changes in receivables, inventory, and operating liabilities.

How do you calculate operating cash flow?

In simple terms: Operating cash flow = Net income + Depreciation + Increase in provisions − Increase in receivables − Increase in inventory + Increase in operating liabilities. It shows the cash flow generated from core business operations.

What is free cash flow and how is it calculated?

Free cash flow (FCF) shows how much cash remains available after investments. In simple terms: FCF = Operating cash flow − Capital expenditures. It is important for debt repayment, distributions, reserves, and growth.

What is discounted cash flow (DCF)?

Discounted cash flow is not a type of cash flow itself, but a valuation method. It involves discounting expected future cash flows to their present value using a discount rate.

How do you calculate the cash flow of a property?

In simple terms: Cash flow = Rental income − Non-recoverable operating expenses − Debt service (interest and principal). A positive value means that the property is self-sustaining from a cash flow perspective and generates a surplus.

Can I calculate cash flow using Excel?

Yes, for individual companies, simple structures, or real estate, Excel is often sufficient. As soon as multiple accounts, scenarios, or real-time data are involved, cash flow software usually becomes more efficient and less prone to errors.

Sources

• Creditreform Economic Research: Insolvencies in Germany, 2025
• Intuit QuickBooks: The State of Small Business Cash Flow, 2019
• Intrum: European Payment Report 2026
• Intrum: European Payment Report 2026 – Late payments are holding back European growth
• Accounting Standards Committee of Germany (ASCG): DRS 21 Cash Flow Statement, last revised 2023
• Gabler Business Dictionary: Discounted Cash Flow Method
• PYMNTS: 72% of Treasurers Still Do Cash Flow Forecasts Manually, 2022
• PYMNTS Intelligence: Time to Cash™: A New Measure of Business Resilience, 2025