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# What are the Different Types of Cash Flow Formula?

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• Written By: Osmand Vitez
• Edited By: Kristen Osborne
• Last Modified Date: 27 May 2018
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In business, cash is king. Many companies use a specific cash flow formula to calculate cash flow to ensure they have enough liquidity in business. Common types of cash flow formulas include the free cash flow, discounted cash flow, operating cash flow, and the statement of cash flows. The first three are simplistic formulas that require some estimating of future cash flows and what these figures mean to a company’s current operations. The statement of cash flows is a professional statement released to all business stakeholders as an official cash position.

Free cash flow is the amount of cash a company has to distribute among the individuals or groups invested in the company. The basic formula for this calculation is net income plus depreciation and amortization expense, less working capital changes and capital expenditures. Depreciation and amortization is added back to net income because these figures are non-cash items. The expenditures listed on the income statement for depreciation and amortization is simply accounting figures. Changes in working capital are the additions or subtractions relating to current assets and current liabilities.

Discounted cash flow is a cash flow formula that takes estimated future cash flows and discounts them back to the current time’s dollar value. This helps companies determine if new business opportunities are worth the initial expense. For example, a company expecting to earn \$150,000 US Dollars (USD) will discount this figure to the current dollar value using the company’s cost of capital figure. The cost of capital interest rate is what companies must pay for the use of external funds, whether debt or equity. This cash flow formula is primarily for use as a corporate finance forecasting tool.

Operating cash flow is one section of the statement of cash flows. This portion relates to the cash inflows and outflows related directly to a company’s normal business operations. While similar to the free cash flow formula, the operating cash flow contains a few extra pieces. The formula deducts increases in account receivables, investment income and other income from the company’s net income. The company will then add expenses reported as losses and deduct an increase in accounts payable, depreciation, impairments or other accounting figures and financing expenses. The result is the actual cash flow from normal business operations.

The statement of cash flows includes the operating cash flow formula, and includes cash inflows and outflows from investment and financing operations. This allows the company to determine the cash flow from the sales of assets and generated from selling bonds, issuing stock, paying dividends and other activities involving the company’s cash resources.