How to calculate cash flow: formulas, steps, examples

Published Monday 20 April 2026

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
• What is net cash flow?
• How to read a cash flow statement
• FAQs on calculating cash flow

Key takeaways

• Calculate net cash flow by subtracting your total cash outflows from your total cash inflows, so you can see clearly whether your business generated or used cash during a specific period.
• Prioritise operating cash flow as your main measure of business health, since positive cash flow from day-to-day activities confirms your core business model is sustainable.
• Use the three cash flow categories — operations, investing, and financing — to build a complete cash flow statement that shows exactly where your money comes from and where it goes.
• Review your cash flow regularly, create frequent budgets, and automate invoice follow-ups so you can spot potential cash shortages before they affect your ability to pay bills or invest in growth.

What is cash flow?

Cash flow is the movement of money in and out of your business over a specific period. It shows whether your business is generating or consuming cash.

Your cash flow position falls into one of two categories:

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

For small businesses, monitor cash flow carefully. You can be fined £3,000 by HMRC or disqualified as a company director if you don't keep accounting records. A single large transaction can significantly shift your financial position.

Tracking your cash flow helps you make informed business decisions. Here's why it matters:

• Make better decisions: know exactly what money you have available
• Manage risk effectively: spot potential cash shortages before they become problems
• Plan for growth confidently: 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 the money generated from your core business activities. It shows whether your day-to-day operations produce enough cash to sustain your business.

Here's how to calculate operating cash flow:

Operating cash flow calculation

Revenue from operations - Operating expenses = Operating cash flow

Operating cash flow is a key metric for several reasons:

• Confirm business viability: verify your core business model works
• Check sustainability: see if operations cover basic costs
• Assess growth readiness: positive operating cash flow enables expansion

Free cash flow (FCF) is the cash remaining after paying for essential business operations and capital investments. This money is available for growth, debt repayment, or owner distributions.

Here's how to calculate free cash flow:

Free cash flow calculation

Operating cash flow - Capital expenditures = Free cash flow

Lenders and investors pay close attention to free cash flow for several reasons:

• Assess repayment ability: see the cash available to service debt
• Evaluate growth potential: identify funds available for expansion
• Measure return capacity: understand the ability to pay dividends or distributions

Having cash beyond your basic bills makes it easier 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

Three main types of cash flow combine to give you your total net cash flow. When you understand these formulas, you can see a clearer picture of your business's financial health, even if accounting software does the maths for you.

• Cash flow from operations: covers cash generated from everyday business activities, such as sales and paying suppliers
• Cash flow from investing: tracks cash used for or generated from investments, such as buying or selling property or equipment
• Cash flow from financing: includes cash that comes from or goes to owners, investors, and lenders, such as 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. Keep in mind that you must keep these records for six years from the end of the last company financial year they relate to.

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

In this formula, the terms mean:

• Cash inflows: all money received, including sales, loans, asset sales, and investments
• Cash outflows: all money spent, including expenses, loan payments, and asset purchases

Net cash flow provides valuable insights into your business performance:

• Assess financial sustainability: determine whether your business generates enough cash to survive
• Gauge investment capacity: understand how much money you can safely spend on growth
• Identify problems: pinpoint where you need to increase income or reduce expenses
• Verify planning accuracy: confirm if your business model works in practice

Calculating net cash flow: an example

Calculate your net cash flow by subtracting total cash outflows from total cash inflows. Here's a simple example:

• Total income for January 2023: £30,000
• Total expenditure for January 2023: £15,000

Calculation: £30,000 − £15,000 = £15,000

Net cash flow: £15,000

If you'd prefer an easier option, 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.

When you understand where your net cash flow comes from, you can assess the financial health of your business. If you're generating most of your income from selling your equipment or assets, your positive cash flow may indicate an unsustainable pattern.

If you recently invested in bigger premises to support your growing team, negative cash flow may reflect a strategic growth investment. That's why cash flow statements are useful – they help you understand where money is being spent and generated.

How to read a cash flow statement

A cash flow statement tracks all money flowing in and out of your business during a specific period. It shows your starting cash, ending cash, and exactly where every pound went.

Getting it right matters, especially since cash flow statements are consistently identified by the Financial Reporting Council (FRC) as a "top 10" issue in corporate reports. The FRC notes that most errors in these statements could be avoided with robust review processes, as highlighted by the Institute of Chartered Accountants in England and Wales (ICAEW) guidance on common pitfalls.

A cash flow statement reveals three key figures. These help you track your cash position over time:

• 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. Each section tracks a different type of cash movement:

Operating cash flow: money from day-to-day business activities including sales revenue and customer payments, payroll, rent, utilities and inventory costs, and regular business expenses.

Investment cash flow: money from buying or selling major assets including property purchases or sales, equipment and vehicle transactions, and business acquisitions.

Financing cash flow: money from loans and investor activities including bank loans received or repaid, investor funding or dividend payments, and 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.

Here's how to calculate cash flow step by step:

Step-by-step cash flow calculation

Follow these steps to calculate cash flow for your business:

1. Start with your opening cash balance from the beginning of the period
2. Add all cash inflows from operations, investing, and financing activities
3. Subtract all cash outflows from operations, investing, and financing activities
4. Calculate your closing cash balance to confirm your net cash position

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. Get one month free.

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

FAQs on calculating cash flow

Here are answers to common questions about calculating cash flow for your business.

How often should I calculate cash flow?

Calculate your cash flow at least monthly to stay on top of your business finances. Many businesses benefit from weekly cash flow calculations, especially during growth periods or when managing tight margins. Regular calculations help you spot trends early and make informed decisions about spending and investment.

What's the difference between cash flow and profit?

Profit measures your revenue minus expenses over a period, while cash flow tracks actual money moving in and out of your business. You can be profitable on paper but still run out of cash if customers haven't paid you yet or you've invested heavily in inventory or equipment.

Can I have positive cash flow but still lose money?

Yes, you can have positive cash flow while making a loss. This happens when you receive cash from sources other than operations, such as taking out a loan, selling assets, or receiving investor funding. While this cash helps in the short term, it's important to ensure your core operations generate positive cash flow for long-term sustainability.

What causes negative cash flow?

Negative cash flow occurs when more money leaves your business than comes in. Common causes include slow-paying customers, high operating expenses, large one-off purchases, rapid expansion, or seasonal fluctuations in sales. Understanding the cause helps you address the issue effectively.

How can accounting software help with cash flow calculations?

Accounting software like Xero automatically tracks all your transactions and generates cash flow statements instantly. The software categorises your income and expenses, calculates your cash position in real-time, and helps you create forecasts. This saves time and reduces errors compared to manual calculations.