Annualizing past cash flows involves combining the net cash flow figures from a company's monthly or quarterly performance statistics. Calculating future cash flows as an annual figure requires estimating the company's performance using assumptions and past performance as guidelines. While you can never create an absolutely accurate portrait of future cash performance, considering all possible market and product impacts will make your estimate more reliable.
1. Remove all non-cash items from the net income figure on the company's balance sheets: for example, subtract depreciation losses and accounting gains, which are both accounting figures rather than cash figures.
2. Add any cash items that are not included in the net income figure: for example, include the loss of warranty replacements paid to customers in cash.
3. Combine the monthly and quarterly cash-based income figures to create an annual cash flow figure. For example, if the company had an $8,000 positive cash flow during the first three quarters and then a $4,000 cash flow deficit in the fourth quarter, the annual cash flow figure would be $20,000.
4. Estimate cash revenue and payouts for future annual cash flows. Include all possible cash flows for a more accurate figure. Consider the impact of any new products or services on existing operations. For example, guess the impact of demand for a new product on the company's other products.
- "Free Cash Flow"; George C. Christy; 2009
- "Corporate Finance Demystified"; Troy Adair; 2011
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