Cash Flow Computation

Cash Flow Computation
The total cash flow for a period can be computed as:


Income from Operations (*see below)
+ Depreciation
- Taxes
- Capital Spending
- Increase in Working Capital
------------------------------
Total (Free) Cash Flow


Explanation:

Income from operations equals revenue minus costs and expenses and is the major source of cash.  

However, two adjustments must be made to get to actual cash inflow:

• Income from operations is before taxes are deducted, so taxes need to be subtracted here to get a corrected cash flow,
• Also, depreciation charges are included in income from operations but do not lower cash in the period, so depreciation is added back to get a corrected cash flow.

Finally, only changes (up or down) to the components of working capital (inventory, receivables, payables, etc.) in the period are part of computing cash flow.  If working capital has increased, cash is required this will need to be subtracted from total cash flow.

(Additional note:  The total cash flows used in an NPV (net present value) analysis should come from well-prepared proforma financial statements developed for the project.  The total project cash flows for a period can be computed as above.)

----

Income Statement

for the period x through y

Net Sales

- Cost of Goods Sold

-------------------------

Gross Profit

Sales & Marketing

Research & Development

General & Administrative

--------------------------

Operating Expenses

Gross Profit

- Operating Expenses

-------------------------

Income from Operations*

+ Net Interest income

- Income taxes

-------------------------

Net Income