How to calculate cash flow?

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How to calculate cash flow?




Cash flow is the representation of how cash moves in and out of your business. However, for small businesses calculating cash flow is not as simple as it sounds. The cash flow formula is a lot more from estimating revenue or expenses alone. 


This is why many entrepreneurs fail at this stage because it is ultimately cash that you need to pay bills. For small businesses, cash flow management is a crucial component of the firm's financial state. 


Every business owner needs to know what is cash flow and what it means for its business. Let's get a better understanding of how cash flows into and out of your business & how to manage cash flow for small business.


There are three formulas for calculating cash flow and these are described below in detail. 


1) Free Cash Flow (FCF): One of the most basic and significant cash flow formulas is free cash flow (or FCF).

A regular cash flow statement reflects the state of your business’s cash at a given point. This does not show the amount you have or are free to use hence, this does not always aid with planning and budgeting.


Free cash flow calculates the cash you have available to spend and this helps you decide whether you can make any new investments? if you have enough money to buy any new system? and many more queries like this. 


Calculating the free cash flow of your company is not that difficult as you think it is. firstly, you will need to generate your company's balance sheet/ income statement with the help of any accounting software so that you can get the key financial numbers.  


The financial keys that you will be needing to calculate free cash flow are:-


Net income: It is the total funds remaining after deducting business expenses from total revenue. it is mentioned in your Income Statement.


Depreciation/Amortization: Depreciation is the determination of how multiple business assets (like machines) lose value over time. On the other hand, Amortization is a way of splitting down the original cost of an asset over its existence. Depreciation and Amortization are mentioned on your Income Statement.


Working Capital: Working capital is the difference between total assets and liabilities. This mirrors the capital used in the daily conduct of your business. Working capital can be calculated using the total assets and liabilities mentioned on the Balance Sheet.


Capital Expenditure: Capital expenditures constitute money you spend on fixed assets, like property, real estate, or accessories. Capital expenditure is mentioned in the Statement of Cash Flows.


So the formula for calculating free cash flow is:

Free Cash Flow = Net income + Depreciation/Amortization – Change in Working Capital – Capital Expenditure




2) Operating Cash Flow (OCF): Free cash flow gives you an idea of the total funds ready to reinvest in the company.


But it doesn’t always present the realistic picture of everyday cash flow. If you trade off a big asset, the free cash flow would go higher but this doesn’t show normal cash flow for your occupation because the FCF formula doesn’t consider irregular spending, receiving, or expenses.


Hence, to get a better idea of actual cash flow for your firm, you should use the operating cash flow (OCF) formula.


Just like the calculation of our free cash flow, you’ll need your balance sheet and income statement so that you can get the numbers required in calculating operating cash flow.


The financial key that you must know to calculate the Operating Cash Flow is:


Operating Income: It can also be called as the income from operations. It measures the profit obtained from a business's operations, after deducting operating costs such as wages, depreciation, and the price of assets sold.


Operating income is mentioned on your Income Statement.


So, the formula for calculating the operating cash flow is:

Operating Cash Flow = Operating Income + Depreciation – Taxes + Change in Working Capital


3) Cash Flow Forecast: When you are planning for the future of your business, only FCF and OCF is not what you need. hence, calculating your cash flow for the forthcoming month or quarter is a great practice to help you understand how much cash you’ll have on hand then.


Cash flow problems are responsible for many small business failures hence, it is important to assure positive cash flow before you begin consuming.


The CFF is one of the easiest formulas to calculate. no complex financial keys are involved—it’s simply a calculation of the cash you await to make and consume over (typically) the next month or quarter.


So, the formula for calculating the cash flow forecast is:

Cash Flow Forecast = Beginning Cash + Projected Inflows – Projected Outflows = Ending Cash


Here, beginning cash is the net cash your business has in hand today. Project inflows are the cash you await to get during the assigned period of time.  

Project outflows are the expenses that you’ll make in the given period of time.


No business owner wants to face money problems hence, keeping a cash flow will help you get a better understanding of your company's financial health. You can always predict a cash flow problem and can deal with it before it strikes.


Location: United States

Comments

  1. MoolamoreSeptember 28, 2023 at 12:41 AM

    Calculating cash flow involves assessing the movement of cash into and out of a business or individual's financial activities. There are different ways to calculate cash flow, and the specific method you choose may depend on your needs and the information available.

    Moolamore is an advanced accounting application that analyzes, manages, and projects real-time transaction data. Using our cash flow forecasting software and app, you can forecast and estimate your company's future financial position. Financial Management

    ReplyDelete

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