Cash Flow from Operations Formula

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 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, non-cash 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
Non-cash Expenses: Short term non-expense
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.

You can download this Cash Flow from Operations Formula Excel Template here – Cash Flow from Operations Formula Excel Template

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 non-cash expenses of the company are $10,000 and changes in working capital is $2,000.

As we know,

CFO = Net Income + Non-cash 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 income-related 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:-

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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, non-cash 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, non-cash payment is also considered as payment entry for same is done from non-cash 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, non-cash charges and changes in operating accounts.

CFO_indirect = Net Income + Gain & Losses from Financing & Investment + Non-cash 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 + Non-cash 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.