How to calculate your small business cash flow: Simple formulas and examples

Published Friday 5 December 2025

Table of contents

• What is cash flow?
• Operating cash flow versus free cash flow – what's the difference?
• Cash flow formulas you need to know
• Cash flow statements: how to calculate cash flow
• What is net cash flow?
• Interpreting your cash flow results
• The importance of effective cash flow management
• Enhance your cash flow with Xero
• FAQs on calculating cash flow

Key takeaways

• Calculate your net cash flow by subtracting total cash outflows from total cash inflows to get a clear snapshot of whether your business generated or consumed cash during a specific period.

• Focus on operating cash flow as your primary health indicator, since positive cash flow from day-to-day business activities demonstrates that your core business model is sustainable and viable.

• Generate cash flow statements regularly using the three main categories (operations, investing, and financing) to understand exactly where your money comes from and where it goes, rather than relying on a single net cash flow figure.

• Implement practical cash flow management by creating frequent budgets, automating invoice follow-ups, and reviewing cash flow forecasts regularly to spot potential problems before they affect your ability to pay bills or invest in growth.

What is cash flow?

is the money that moves in and out of your business during a specific period. It directly shows whether your business generates or consumes cash.

Your cash flow position can be:

• Positive cash flow: More money comes in than goes out
• Negative cash flow: More money goes out than comes in

Small businesses must monitor cash flow closely because a single large transaction can significantly impact your financial position.

Why cash flow tracking matters:

• Better decision-making: Know exactly what money you have available
• Risk management: Spot potential cash shortages before they become problems
• Growth planning: Understand when you can afford new investments

Read our guide to understand more about the difference between cash flow and profit.

Operating cash flow versus free cash flow – what's the difference?

Operating cash flow measures money generated from your core business activities. It shows whether your day-to-day operations produce enough cash to sustain your business.

Operating cash flow calculation

Revenue from operations - Operating expenses = Operating cash flow

Why it matters:

• Business viability: Confirms your core business model works
• Sustainability check: Shows if operations cover basic costs
• Growth readiness: Positive operating cash flow enables expansion

is the cash remaining after you've paid for essential business operations and capital investments. This money is truly 'free' for you to spend on growth, debt repayment, or owner distributions.

Free cash flow calculation

Operating cash flow - Capital expenditures = Free cash flow

Why lenders and investors focus on FCF:

• Repayment ability: Shows cash available to service debt
• Growth potential: Indicates funds available for expansion
• Return capacity: Demonstrates ability to pay dividends or distributions

If you only just cover your bills, it can be harder to attract funding. Lenders and investors want to see how much cash you have available now and what extra borrowing you could access if needed.

Check out our guide on how to create a calculation of cash flow from operations.

Cash flow formulas you need to know

While accounting software can do the maths for you, it's helpful to know the basic formulas. Understanding them gives you a clearer picture of your business's financial health.

There are three main types of cash flow that combine to give you your total net cash flow.

• Cash flow from operations: The cash generated from your everyday business activities, like sales and paying suppliers.
• Cash flow from investing: The cash used for or generated from investments, such as buying or selling property or equipment.
• Cash flow from financing: The cash that comes from or goes to owners, investors, and lenders, like loans or owner drawings.

The main formula brings these three together:

Net Cash Flow = Cash Flow from Operations + Cash Flow from Investing + Cash Flow from Financing

This gives you the total amount of cash that has moved in and out of your business over a period.

Cash flow statements: how to calculate cash flow

tracks all money flowing in and out of your business during a specific period, and it's vital to get it right, as the Financial Reporting Council (FRC) notes that most of the errors in these statements could be avoided with robust review processes. It shows your starting cash, ending cash, and exactly where every pound went.

The statement reveals:

• Opening balance: Cash available at the start of the period
• Cash movements: All money in and out during the period
• Closing balance: Cash remaining at the end of the period

Cash flow statements contain three main sections:

1. Operating cash flow: Money from day-to-day business activities

• Sales revenue, customer payments
• Payroll, rent, utilities, inventory costs
• Regular business expenses

2. Investment cash flow: Money from buying or selling major assets

• Property purchases or sales
• Equipment and vehicle transactions
• Business acquisitions

3. Financing cash flow: Money from loans and investor activities

• Bank loans received or repaid
• Investor funding or dividend payments
• Credit line draws or repayments

Healthy businesses will usually see most of their cash flow activity happening in the cash flow from operations section. This is money earned from sales and spent on day-to-day expenses.

If you use cloud accounting software like Xero, you can generate a cash flow statement automatically.

Step-by-step cash flow calculation

Follow these key steps to effectively calculate cash flow for your small business.

• Step 1: Record your starting cash balance from the previous period
• Step 2: Calculate operating cash flow. Add all business income received and subtract all operating expenses paid
• Step 3: Calculate investment cash flow. Add money from asset sales and subtract money spent on new assets
• Step 4: Calculate financing cash flow. Add loan proceeds and investor funding and subtract loan repayments and dividends
• Step 5: Calculate total cash movement and add the three cash flow totals together (positive or negative)
• Step 6: Calculate ending balance. Starting balance + total cash movement = ending cash balance

Example of a cash flow statement to see one in action.

Using a cash flow statement

Key cash flow statement insights for small businesses:

Net cash movement: Shows total money gained or lost during the period

• Combines all three cash flow categories
• Positive number means cash increased
• Negative number means cash decreased

Closing balance: Your available cash at period end

• Positive balance means cash available for spending
• Negative balance indicates cash flow problems requiring immediate attention

Opening vs closing comparison: Reveals cash flow trends over time

This can be perfectly normal – your cash flow position changes every time money is spent or paid into your business. Persistent negative cash flow can be a cause for concern, though. Along with cash flow forecasting, calculating your quick ratio can help you assess your immediate capacity for covering costs. And check in with your accountant or bookkeeper if you're worried about the numbers.

What is net cash flow?

Net cash flow measures the total change in your business cash during a specific period. It shows whether your business generated or consumed cash overall.

Net cash flow formula:Total cash inflows - Total cash outflows = Net cash flow

Where:

• Cash inflows: All money received (sales, loans, asset sales, investments)
• Cash outflows: All money spent (expenses, loan payments, asset purchases)

What net cash flow tells you:

• Financial sustainability: Whether your business generates enough cash to survive
• Investment capacity: How much money you can safely spend on growth
• Problem identification: Where you need to increase income or reduce expenses
• Planning accuracy: If your business model works in practice

Calculating net cash flow: An example

You can calculate your net cash flow by subtracting your total cash outflows from your total cash inflows. Like this:

Total income for January 2023 = £30,000Total expenditure for January 2023 = £15,000

£30,000 - £15,000 = £15,000

Net cash flow = £15,000

If you'd prefer not to do the maths yourself, you can use the Xero cash flow calculator to work it out for you. Online accounting software like Xero gives you all the tools to calculate and manage your cash flow – without the complicated sums.

Understanding where your net cash flow comes from can help you get a view of the financial health of your business. If you're generating most of your income from selling your equipment or assets, then your positive cash flow isn't necessarily a good sign.

If you recently invested in bigger premises to support your growing team, then negative cash flow isn't necessarily a bad sign. That's why cash flow statements are useful – they help you understand where money is being spent and generated.

Interpreting your cash flow results

Once you've calculated your cash flow, the next step is to understand what the numbers mean. A single figure doesn't tell the whole story – context is everything.

A positive cash flow is usually a good sign, as it means more money is coming into your business than going out. But it's important to see where that cash is coming from. If it's mainly from taking out new loans rather than from sales, it might be masking an underlying issue.

Similarly, negative cash flow isn't always a red flag. If you've invested in new equipment or property to grow your business, your cash flow from investing will be negative. This is a normal part of expansion. However, if you have persistent negative cash flow from your daily operations, it could be a sign of trouble.

The key is to look for healthy, positive cash flow from your core business operations, as this shows your business is sustainable and generating cash on its own.

The importance of effective cash flow management

A clear view of your cash flow helps you spot the financial strengths and weaknesses of your business. Through cash flow statements, projections, and reports, you can see the impact of expenditure and the activities that generate the most income. Understanding credit notes comes in handy here, too.

Managing your cash flow well can make it easier to attract investment. Research from the Financial Reporting Council shows that clear liquidity risk reporting helps show whether a business is viable. If you can demonstrate that your business model is financially sustainable, lenders and investors will feel confident about financing your business. Where finances aren't so good, you can use reports and projections to spot potential gaps in your income before they become an issue.

Proper cash flow management means you're never in the dark about how much you have to spend.

You can also highlight possible cash flow problems before they affect your ability to pay bills or invest.

Practical tips for cash flow management

Keeping on top of your cash flow doesn't have to be complicated. With the help of some effective cash flow management strategies, you can get a clear picture of your finances.

Try these five practical cash flow management tips:

• Create and review your budgets frequently to make sure you're operating within your means
• Calculate your free cash flow to see if you're making a regular profit (or just covering costs)
• Create and review cash flow forecasts frequently so you know what's coming up ahead
• Generate cash flow statements often to see the different levels of income and expenditure across your business
• Digitise your invoicing process and automate follow-ups to prevent late payments that disrupt cash flow

There are warning signs that indicate whether you'll run into cash flow trouble. We've shared them in our cash flow challenges report.

For more ways to make sense of the numbers, check out our cash flow management tips.

Enhance your cash flow with Xero

You can get a clear view of your cash flow with Xero. See up-to-date cash flow statements, forecasts and reports in a few clicks with Xero cash flow management tools. See your financial position at a glance, with a live dashboard that gathers financial data from across your accounts.

For more on managing your business finances, visit our cash flow support content hub.

FAQs on calculating cash flow

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What's the simplest way to calculate cash flow?

The most basic way is to calculate your net cash flow for a period. You do this by subtracting your total cash payments from your total cash income. This gives you a quick snapshot, but a full cash flow statement provides much more detail about where your money is coming from and going to.

Can you calculate cash flow from a balance sheet?

Yes, you can calculate cash flow using information from both your balance sheet and income statement. This is known as the indirect method. It starts with net income and then adjusts for non-cash items (like depreciation) and changes in working capital accounts (like accounts receivable). It's a bit more complex, which is why most small businesses rely on accounting software to do it automatically.

What's the difference between cash flow and profit?

Profit is the money your business has left after subtracting all expenses from revenue. Cash flow is the actual cash moving in and out of your bank account. A business can be profitable but have negative cash flow if, for example, its customers are slow to pay their invoices. Both metrics are important for understanding your business's financial health.