How to Calculate Cash Flow (and Why This Number Matters)

As a small business owner, it can sometimes feel like you’re alone on a desert island with no help in sight for the endless financial reports you have to deal with. This blog post on how to understand and calculate cash flow is the 3rd in a series we’ve been doing on the “3 Types of Financial Statements Your Business Needs”…the main reports you would need if you were shipwrecked on a desert island but still had to keep running your business. (Don’t think too hard about how those reports get to you, though. It makes the analogy fall apart.)

We’ve covered the first two, Monthly Balance Sheets and Monthly Income Statements, already. (Be sure to head over to those posts once you’re done with this one if you missed them.) Each of those reports can give you valuable insights into your business finances, but many accounting professionals believe that this one, the Cash Flow Statement, is the most essential.

Cash is absolutely critical in order for your business to make it…especially in today’s business climate. Companies that have it simply have a lot more options than those that don’t. And as we’ve seen during the COVID lockdowns of 2020, having cash on hand can often mean the difference between survival and closing your doors for good.

Since your Cash Flow Statement is so important, it’s worth doing right. So let’s get started!

What is a cash flow report?

Before you can learn how to calculate a cash flow report like a pro, you need to know what one is. You’d be surprised how many people try to run businesses without even realizing such a report exists.

We get it! Being an entrepreneur is exciting, and it’s easy to just dive into building your business. But over the years, we’ve seen what can happen when you fail to manage your money well. That’s why we’re here with the info you need to get off that desert island!

A Cash Flow Report (or Cash Flow Statement), is a financial report that tracks the flow of money into and out of a business.

It measures how well your company is able to pay its debts and other financial obligations. It also helps investors, creditors, and other interested parties assess the financial health of your company.

What does a Cash Flow Statement show?

Your company’s Cash Flow Statement shows how your business handles cash in three different areas:

  1. Operating Activities
  2. Investing Activities
  3. Financing Activities

Unlike the Balance Sheet and Income Statement, it only represents actual money received or spent during a specific period of time. It does not reflect future payments or credits.

It’s entirely possible that your business may reflect a lot of profit on your Income Statement (or “Profit & Loss Statement”), but still be broke and unable to pay your bills this month. Your profitability in that scenario is based on accounts receivable, not actual cash.

That’s why it’s important to look at all three reports side-by-side in order to get a full picture of your financial situation.

What goes on a Cash Flow Statement?

Let’s break down the three areas of cash flow. Your Cash Flow Statement will reflect activity from (but not limited to) these examples:

  • Operating Activities
    • Receipts from sales you made
    • Wages paid to your employees
    • Rent payments
    • Payments on taxes or interest
    • Payments made to your suppliers
  • Investing Activities
    • Sale of property, equipment, or other assets
    • Purchase of property, equipment, or other assets
  • Financing Activities
    • Proceeds from issuing bonds, mortgages, or other notes
    • Payments on amounts you’ve borrowed
    • Distributions to owners

Do you know how to calculate cash flow?

If you wonder how to calculate net cash flow, the formula is: net cash flow = cash inflows – cash outflows.

When you include the three areas of cash flow we discussed above–Operating Activities (CFO), Investing Activities (CFI), and Financing Activities (CFF)–the formula can be expanded to look like this: Net Cash Flow = CFO+CFI+CFF.

Let’s make up an example of what this might look like in your business. Imagine that your business brought in revenue in the month of July totaling $250,000. That would be your “cash inflow” for that period of time. Your expenses, “cash outflows”, for that same period were $100,000. Therefore, your “net cash flow” for July was $150,000.

I think we’d all enjoy a month like that! For several more examples, check out this article on net cash flow from Investing Answers.

It’s important to note, however, that net cash flow is not always positive. There are times when it can be a negative number…and that’s not necessarily bad. It just depends on the circumstances.

If it’s negative because you went on a wild spending spree, you may have a problem. It would mean dipping into your reserves to make up the difference, but you’d certainly want to start getting some revenue in the door to keep that from happening again.

If it’s negative because you paid off a significant amount of debt or invested in expensive pieces of equipment to be able to take on more work, then your cash flow issue isn’t as alarming.

To really be able to see the full picture, your Cash Flow Statement needs to be read alongside your Balance Sheet and Income Statement.

Reach out to a pro.

To go even further and learn how to better manage your cash flow, we did a separate post in which we gave out 4 Simple Metrics to help you make the most of your Cash Flow Statement.

The best way to stay on top of your cash flow, though, is to take advantage of our Cash Flow Management Service.

Our cash management service allows you to…

  • know when, where, and how your cash needs will occur.
  • know what the best sources are for meeting your additional cash needs.
  • be prepared to meet these needs when they occur, by keeping good relationships with bankers and other creditors.

Then when you’re ready to really move from frustration to freedom, why not partner with us to handle all of your monthly bookkeeping? Imagine having the most up-to-date financial information about your business at your fingertips…without the stress of doing it all yourself! Let our pros crunch the numbers while you go build your business.

Schedule a call today to get started!

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Jul 28, 2021
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