Operating Cash Flow
In accounting, operating cash flow (OCF), or cash flow from operating activities (CFO),
refers to the amount of cash a company generates from the revenues minus expenses associated
with long-term investment on capital items or investment in securities.
The International Financial Reporting Standards defines operating cash flow as cash generated
from operations and investment income less taxation, interest and dividends paid. To
calculate cash flow from operations, one must calculate the difference in cash generated
from customers and cash paid to suppliers.
OCF = EBIT - Interest - Taxes + Depreciation
Free Cash Flow
In corporate finance, free cash flow (FCF) or free cash flow to firm (FCFF) can be calculated
by taking operating cash flow and subtracting capital expenditures. It is a method of
looking at a business's cash flow to see what is available for distribution to the
securities holders of a corporate entity.
This may be useful to owners of equity, debt, preferred stock, convertible security, and so
on when they want to see how much cash can be extracted from a company without hindering its
Free Cash Flow Formula
FCF = OCF - net investment in operating capital
Discounted Cash Flow
Discounted cash flow (DCF) analysis is a method of valuing a project, company, or asset using
the concepts of the time value of money. All future cash flows are estimated and discounted
by using cost of capital to give their present values (PVs). The sum of all future cash
flows, both incoming and outgoing, is the net present value (NPV), which is taken as the
value or price of the cash flows in question.
DCF = [(CFn/1 + r)^1] + [(CFn/1 + n)^n]
CFn = Cash Flow in year n
R = Discount rate
N = year
Why Calculating Cash Flow is Important
If cash is king, cash flow must be sorcerer. Cash flow is one of the most powerful principles
in business because it’s the lifeblood of every business and not as straightforward as
Perhaps your customers pay you on 30-, 60-, or even 90-day terms, these accounts receivable
are cash flows that aren’t as predictable as say a monthly subscription SaaS business.
If your suppliers expect to be paid every month, the variation in payment terms can cause
serious cash flow problems.
It might be obvious, but true, that most businesses fail because they run out of money. This
could be because they make risky investments in product development and inventory that
can’t be liquidated, or because they fail to collect on their account receivables
before their debts and account payables go to collections.
Calculate your cash flows at a regular cadence to understand the health of your business.
Consider worst case scenarios for changes in customer demand, interest rates, tax rates and
more to be prepared with adequate cash reserves.