A common business valuation approach is to calculate the net present value ('NPV') of future cash flows for a company. It's an income approach to valuation the basically tries to find out how much the company's future cash generated is worth today.
If the term "net present value" is totally foreign to you, take a look at our article on the time value of money.
Use our company valuation calculator to help you find out what your business is worth. Definitions of the various fields can be found below the calculator.
NPV Value of your business
This is the value of all of your future cash flows discounted in today's dollars at your Weighted Average Cost of Capital (WACC).
Expected annual growth
This is the rate you expect your business to grow. This rate is only used on years 5 and above to estimate your future cash flow.
Weighted average cost of capital (WACC)
This is the cost of capital, or the interest rate, your investors require to put money into your business. Unless you are a Fortune 500 company with excellent business credit scores, this rate should be at least 12% to 25%. For small businesses that rate can be much higher.
This is your total profit before interest and taxes. This is often called Earnings Before Interest and Taxes or EBIT.
Total interest expense for the year.
Total interest income for the year.
Total income taxes paid for the year.
Depreciation and amortization
If you had any depreciation on equipment or land enter those amounts here. They are added back into your cash flow.
Change in accounts payable
If you had a net change in your accounts payable, enter the change here. If you have an increase in accounts payable, your cash flow goes up. If you have had a decrease in your accounts payable, your cash flow is reduced.
Change in inventory
If you had a net change in your inventory, enter that amount here. If you are holding more inventory your cash flow is decreased.
Change in accounts receivable
If you had net change in your accounts receivable, enter that amount here. Reducing your accounts receivable by collecting money owed more quickly can increase your cash flow and your valuation.
Changes in operating assets & liabilities
Enter any net change in operating assets and liabilities.
Other net change
Enter any other net change that impacted your cash flow for the period.
This is the amount you spent on capital equipment and land that you were not able to expense for the period. If you were able to expense the expenditure it is already accounted for in your EBIT.
Additional investment income
Enter any other investment that increased or (decreased) your cash flow for the period.