Calculating Cash Flow

calculating cash flow

Did you know that over 60% of small businesses fail within their first 6 months of operation? This can be because of several reasons, but one of the most common causes is cash flow issues.

When cash flow becomes negative, that means the business is losing money. If it doesn’t turn positive soon, you can expect it to close after.

That’s why cash flow management is important. You also have to take a good look at your inflows and outflows for better financial planning. You also have to know how to calculate cash flow statements.

If you’re still unsure about the last part, we’ll teach you how. Read on to find out if you’re making or losing money each month or year.

1. Create a New Spreadsheet File

A spreadsheet program is the most helpful tool you can have when calculating cash flows. There are free options, and it has all the functions you need for your cash flow calculation.

You might need another tool depending on the complexity of your company. Still, this should suffice for beginners and small businesses.

First, let’s determine whether you want to make an annual or a per month cash flow statement. If you want to see your cash flow per month for a given year, you’ll first have to make separate columns for each month.

Then, proceed with creating different sections for operating, investing, and financing activities. Under each section, list down the items that had positive or negative cash flows. These items would depend whether you’re using the direct or indirect method.

The direct method lists down items that either made you money or made you spend money. You then tally them all up to arrive at the net cash flow. Examples are cash you received from customers, salary payment, and more.

The indirect method, on the other hand, the items are accrual accounting values instead. Examples are inventory, depreciation expense, accounts payable, and such. You use this method for financial modelling.

At the bottom, there should be a total sum and at the bottom of the whole file, there should be a grand total.

2. Calculate New Cash Balance

Whether you’re calculating your net cash flow for the month, for the year, or for any period, you first have to check the beginning balance.

Check how much you had at the beginning of the year or month. Then, subtract that and the cash you have now. What you end up with is then the beginning balance for the next month or year.

There can either be a cash surplus or a deficit. Either way, we’re doing the cash flow to explain the balance we have now.

In your spreadsheet, add a section for your beginning balance. This should be at least one line at the top of the other sections.

3. Calculate Cash Flows Coming from Your Operating Activities

For each of your sections, you’ll list all the inflows and outflows. Inflow is the money that came in from your operating activities, while outflow is the money you spent.

If you use the direct method, your inflow items are going to be cash receipts from customers and the likes. Your outflow items are going to be like employee compensations, cash payments to suppliers, and other items you bought for the operations of your business. This can also include cash payment for taxes, fines, and interest.

If you use the indirect method, your inflow line items will include your net income. Then you’re going to have to make adjustments for depreciation and amortization, increase or decrease in inventories, increase or decrease in trade payables, provision for losses on accounts receivable, and more.

Whichever method you choose, fill in the cost for each line item. Remember to put parentheses “()” or a negative sign “-” for outflows. Tally them up to arrive at your net cash flow for this section.

4. Calculate Cash Flows Coming from Company Investing Activities

In this section, you’ll tally how much your business made (or lost) from your investments. This can include your purchased stocks or bonds of another entity.

The same as the above, you’ll also have to list down your inflows and outflows. For your investing activities, your inflow line items are going to be something like proceeds from sales of equity or sales of assets, as well as principal on notes.

Your outflow items may include the disbursements you made to purchase assets or the equity interest you paid. For the total, get the sum of all your line items under investing activities.

5. Calculate Cash Flows from Financing Activities

For the last section, you’re going to calculate your net cash from debt or equity financing. Your line items may include the cash you received from sales of stocks, borrowing, investment income, and such.

Examples of outflow items are payments for long-term debt and for the reacquisition of equity. The common share dividend payments will also be under this section.

Likewise, you’re going to get the sum of all these items. Don’t forget to make your outflows negative to arrive at the accurate amount of your net cash flow.

6. Add All the Cash Flows from the 3 Categories

For the last step, you’re going to have to add all the totals to arrive at the total amount of your business cash flow for the month or year. As mentioned above, this can either be positive or negative.

If the cash flow is positive, it means you’re generating money. Otherwise, you’re losing money and you should re-evaluate your business model.

There are times, though, that a business may have spent more than what it earned for that month or year. However, this is a topic for another time.

Whatever you get as your total cash flow is then your beginning balance for the next month or year. You’ll have to repeat items 3 to 6 for the next column and the next after that.

More on How to Calculate Cash Flow

Learning how to calculate cash flow is only the beginning. If you find yourself having trouble with the financial matters of your company, we can help. Contact us now and learn how you can make positive cash flow and more.