Cash Flow from Operations Formula (Table of Contents)
 Cash Flow from Operations Formula
 Cash Flow from Operations Calculator
 Cash Flow from Operations Formula in Excel (With Excel Template)
Cash Flow from Operations Formula
Cash flow from operation is cash generated from operational activities like manufacturing or selling goods and services etc. Cash is an important element for business, it is required for the functioning of business some investor give more to cash flow statement than another financial statement. With help of elasticity, cash flow is managed. CFO focus on core business of company it does not include long term expenditure, investments etc. Cash flow from operation (CFO) is a sum of net income, noncash item, and increase in working capital or changes in working capital.
A formula for Cash flow from the operation can be written as follows:
Where,
 Net Income: Total income generated by a company
 Noncash Expenses: Short term nonexpense
 Changes in Working Capital: Value of change in working capital
Examples of Cash Flow from Operations Formula
Let’s see an example to understand Cash flow from operations formula.
Cash Flow from Operations Formula – Example #1
A company named Neno Plastic Pvt. Ltd, manufacture plastic boxes, company has its net income of $ 45,000, total noncash expenses of the company are $10,000 and changes in working capital is $2,000.
As we know,
 CFO = Net Income + Noncash Expense + Changes in Working Capital
 CFO = $45000 + $10000 + $2000
 CFO = $57,000
SO, CFO value is $57,000 for company.
Based on the requirement of the company, parameter available, type of industry, Cash Flow from Operations formula is used for calculations.
Now, let us see those formulas.
Other Cash Flow from Operations Formulas
 When the company has all the details mentioned in the cash flow statement below formula is used and for incomerelated values, the income statement is used. Here, CFO is the sum of funds from operations and changes in working capital. It can be expressed as:
Here, funds of operations is the sum of net income, deferred taxes & investment tax credit, depreciation, depletion & amortization and other funds generated by the company. So, funds from operations can be written as:
4.5 (1,053 ratings)
Funds from Operations = Net Income + Depreciation, Depletion & Amortization + Deferred Taxes & Investment Tax Credit + Other Funds
Now, let us see an example to see its application.
Cash Flow from Operations Formula – Example #2
A company named MK Industries manufactures turbine. It has net income of $100,000.00, depreciation of machinery is $200,000.00, deferred taxes are $300,000.00, other fund company has $100,000.00 and a change in working capital is $10,000.00.
Funds from Operations is calculated using below formula
 Funds from Operations = Net Income + Depreciation, Depletion & Amortization + Deferred Taxes & Investment Tax Credit + Other Funds
 Funds from Operations = $100,000 + $200,000 + $300,000 + $100,000
 Funds from Operations = $700,000
Cash flow from Operations is Calculted using below formula
 CFO = Funds from Operations + Changes in Working Capital
 CFO = $700,000 + $10,000
 CFO = $710,000
So, cash flow from operations is $710,000.
Now, let us see another formula.
 There are various factors which change in value after a period like inventories, tax assets, account receivable and deferred revenue and same reflect in cash flow from operations. While reporting if changes in the asset are positive from one period to other it is recorded as cash outflow and if changes in liabilities are positive from one period to other it is recorded as a cash inflow. A formula for same can be written as:
Cash Flow from Operations = Net Income + Depreciation + Adjustments to Net Income + Changes in Accounts Receivables + Changes in Liabilities + Changes in Inventories + Changes in Other Operating Activities
Let us see an example.
Cash Flow from Operations Formula – Example #3
Suppose a company named RK Industries manufactures auto parts. It has net income of $1,500,000.00, depreciation of machinery is $200,000.00, deferred taxes are $200,000.00, changes in account receivable is $75,000, changes in liabilities is $100,000, changes in inventories is $10,000 changes in other operational activities is $25,000 and adjustment to income is $85,000.
Now, we will calculate cash flow from operations for the company.
 Cash Flow from Operations = Net Income + Depreciation + Adjustments to Net Income + Changes in Accounts Receivables + Changes in Liabilities + Changes in Inventories + Changes in Other Operating Activities
 CFO = $1,500,000 + $200,000 + $200,000 + $85,000 + $75,000 + $100,000 + $10,000 + $25,000
 CFO = $2,195,000.00
Hence, cash flow from operation is $2,195,000.
Explanation
Cash flow from operation is the sum of net income, noncash item expenses and an increase in working capital or changes in working capital. That basically reflect cash which inflow in a company, one can get it from the income statement of the company. The main component that shows cash flow is account receivable, inventory, depreciation, and account payable. The account payable is liabilities account. Cash flow is influenced by company’s income and hence net income is part of the formula, noncash payment is also considered as payment entry for same is done from noncash accounts and changes in working capital is used to cover short term expenses done by the company.
There some other ways too through which one can calculate CFO.
Methods to Calculate Cash Flow from Operation
Direct Method
CFO is calculated by calculating all type of cash transactions like cash expense, cash payment, cash receipt, and cash interest and taxes.
CFO_{Direct} = Cash Receipt – Cash Payment – Cash Expense – Cash Interest – Cash Taxes
Where,
 Cash Receipt = Revenue from sales +/ Decrease in accounts receivable
 Cash Payment = Cost of goods sold + Increase in inventory – decrease in inventory + Decrease in accounts payable – Increase in account payable
 Cash Expense = Includes changes in operating activities.
 Cash Interest = Interest Expense + Decrease in interest payable – Increase in interest payable
 Cash Tax = Tax Expense + Decrease in taxes payable – Increase in taxes payable
Indirect Method
In the indirect method, it adjusts as per changes in the balance sheet. CFO is the sum of net income, gain and losses from financing & investment, noncash charges and changes in operating accounts.
CFO_{indirect} = Net Income + Gain & Losses from Financing & Investment + Noncash charges + Charges in Operating accounts
Let’s see an example.
A company Kim Corporation has below details, we will calculate CFO with both direct and indirect method.
Account receivable  $14,000.00 
Inventory  $2,000.00 
Account payable  $5,000.00 
Sales  $325,000.00 
Gross Profit  $200,000.00 
Income Tax  $16,000.00 
Administrative cost  $10,000.00 
Depreciation  $2,000.00 
Gain & Losses from Financing & Investment  $0 
Net Income  $300,000 
Account receivable  $14,000.00 
Inventory  $2,000.00 
Account payable  $5,000.00 
Calculation with Direct Method–
 Cash receipt = 3,25,000 – 14,000= $3,11,000
 Cash Payment = 2,00,000 – 2,000 – 5,000 = $1,93,000
 Cash Expense = 10,000 – 2,000 = $8,000
 Cash Tax = $16,000
CFO_{Direct} = Cash Receipt – Cash Payment – Cash Expense – Cash Interest – Cash Taxes
CFO_{Direct }= $3,11,000 – $1,93,000 – $8,000 – 0 – $16,000 = $94,000
Calculation with Indirect Method:
Suppose the initial value is zero.
Total changes of operating = 14,000 + 2,000 + 5,000 = $21,000
CFO_{indirect} = Net Income + Gain & Losses from Financing & Investment + Noncash charges + Charges in Operating accounts
CFO_{indirect} = $300,000 + $0 + $10,000 + $21,000 = $3,31,000
Significance and Uses of Cash Flow from Operations Formula
Uses of CFO are as follows:
 CFO helps to check the flow of cash in a business.
 CFO helps to find the area of generation of cash and help to maintain it.
 It helps a company to take a financial decision.
Cash is very much necessary thing for smooth working of a business, it helps a company to expand a business, launch new product, reduce debt, payment of dues etc. If company has cash flow from operation increases and utilized properly then it is predicted that share price of such company will go high in future.
Cash Flow from Operations Formula Calculator
You can use the following Cash Flow from Operations Calculator
Net Income  
NonCash Expense  
Changes in Working Capital  
Cash Flow from Operation Formula =  
Cash Flow from Operation Formula =  Net Income + NonCash Expense + Changes in Working Capital  
0 + 0 + 0 =  0 
Cash Flow from Operations Formula in Excel (With Excel Template)
Here we will do the same example of the Cash Flow from Operations formula in Excel. It is very easy and simple.
You can easily calculate the Cash Flow from Operations using Formula in the template provided.
Cash flow from operations for Neno Plastic Pvt. Ltd is calculated as:
Cash flow from operations for MK Industries is calculated as:
Cash flow from operations for RK Industries is calculated as:
Recommended Articles
This has been a guide to Cash Flow from Operations formula. Here we discuss its uses along with practical examples. We also provide you Cash Flow from Operations Calculator with downloadable excel template. You may also look at the following articles to learn more –
 Formula for Asset Turnover Ratio
 Days in Inventory Formula
 Guide to Dividends Per Share Formula
 Calculate Quick Ratio Using Formula
Financial Analyst Course All in One Bundle
250+ Online Courses
1000+ Hours
Verifiable Certificates
Lifetime Access

Investment Banking Course

Financial Modeling Course

Equity Research Course

Project Finance Course

Business Valuation Course
Leave a Reply