How to Calculate Discretionary Cash Flow

by D. Laverne O'Neal

Calculating a business's discretionary cash flow is like cutting through the forest. While a business' net present value figure may conceal certain obligations, discretionary cash flow gives you a true picture of a company's viability. It is defined as the money that remains after mandatory payments, such as employee wages, are paid and capital projects are financed. Discretionary cash flow can be used to pay stockholder dividends, buy back stock, pay out bonuses or pay off outstanding debt. Calculating the figure requires a number of steps.

Step 1

Find the pretax earnings figure.

Step 2

Add to it all nonoperating expenses and deduct any nonoperating income (such as from the sale of a company division).

Step 3

Add to that any one-time, or nonrecurring, expenses and subtract one-time income (from the sale of assets, for example).

Step 4

Add to the previous entries expenses regarding depreciation and amortization.

Step 5

Add in interest expense and subtract any interest income.

Step 6

Add to the sum the figure for the owner's total compensation.

Step 7

Adjust to market value any compensation to other owners of the business. Market-value salary amounts to what an individual would have to pay an employee to perform the same duties. For example, if a part-owner in a small town typically performs reception duties but is paid an annual salary of $80,000, that salary should be adjusted downward to align with whatever other receptionists in the area would be paid.