A cash flow statement is an essential document for businesses. It shows available cash and can help generate a cash flow forecast, helping you plan for your business’s future growth and showing you where adjustments to your spending must be made.
While your business accountant can calculate your net cash flow, you should also know how to do this. Below, we guide you through calculating cash flow formulas and show how these can benefit your business.
What Is A Cash Flow Statement?
A cash flow statement is vital for small businesses, as it shows your financial records over time. It shows your business’s finances, usually including finances for:
- Investing activities (cash used for your business investments)
- Operating activities (the money used for the day-to-day running of your business)
- Financing activities (money generated from capital contributions and business loans)
Some businesses also include non-cash expenses on their statements, but it is not essential. Cash flow statements are used by companies to determine what money has entered and exited their company. It is handy for accountants to keep track, whether to help you manage your finances, increase them, or identify where spending must be cut.
There are also free cash flow and operating cash flow statements. A free cash flow shows the money your business has left after the expenses are paid, while the operating cash flow shows the money that covers a business’s running costs over a fixed period of time.
Why Are Cash Flow Statements Important?
Cash flow statements help investors determine a business’s value, allowing them to judge its creation of return. But they also help businesses make better decisions. They show you the money you have left over, which can be used for further investments, or where you might be spending too much money, allowing you to adjust your finances to improve your cash flow.
In any case, a positive cash flow statement indicates that your company is healthy, which can help you attract future investments, plan for the future, and share the free cash flow with your employees. It is worth regularly assessing your cash flow statements to assess the health of your business and make adjustments where needed.
How Do I Calculate Cash Flow?
You can use a cash flow formula to calculate your cash flow. The formula sees you add or subtract cash from operating, investing, and financing activities before adding the result to your beginning cash balance. The formula is often displayed as:
Cash flow = cash from operating activities + (-) cash from investing activities + (-) cash from financing activities + beginning cash balance.
To help you see this in terms of your business, we have an example below based on the following statements:
- Beginning cash – $50,000
- Financing activities – $5,000
- Investing activities – $5,000
- Operating activities – $30,000
Cash flow = $30,000 +(-) $5,000 +(-) $5,000 + $50,000 = $70,000
Free Cash Flow Formula
Your accountant might also generate a free cash flow statement. This shows a business’s disposable income or cash at hand, which does not need to be poured into your business or used to pay any loans. This is leftover money that can be used to plan your expenses and prioritise future investments.
To calculate your free cash flow, add your net income and depreciation before subtracting capital expenditure and change in working capital. The formula used is listed below:
Free cash flow = net income + depreciation – change in working capital – capital expenditure
In this formula, your net income is your company’s profit or loss after deducting its expenses. Depreciation is the reduction of current assets over time. Your working capital is the money used to run the business daily, and its capital expenditure applies to fixed business assets like equipment and land. These numbers will be in your company’s income statement or balance sheet.
We have an example below based on figures that could be generated at the end of the first quarter.
- Net Income – $100,000
- Capital expenditure – $40,000
- Change in working capital – $15,000
- Depreciation – $2,000
Free cash flow = $100,000 + $2,000 – $15,000 – $40,000 = $47,000
Operating Cash Flow Statement
An operating cash flow statement shows the money that covers your business’s running costs over a period of time. This statement covers unplanned expenses, investments, and earnings that can impact your business activities.
By tracking your cash from operations, you can see how much is needed to cover operating expenses, helping you to budget. It also allows you to plan for future cash inflows, keeping your business running smoothly.
To calculate operating cash flow, you need to subtract your taxes from the sum of depreciation, operating income, and change in working capital.
Operating income is also referred to as earnings before interest and tax (EBIT) and shows how profitable your company is before interest expenses and tax deductions. You can find this information in your financial statement.
The formula for operating cash flow is listed below:
Operating cash flow = operating income + depreciation – taxes + changes in working capital.
We have included an example of this in action based on a company with an operating income of $30,000, taxes of $5,000, zero depreciation, and $19,000 in working capital:
$30,000 – $5,000 + $19,000 = $44,000
How Does Cash Flow Statements Benefit Businesses?
Cash flow statements have four benefits for business, which we have outlined below:
- They appraise performance – allowing you to evaluate performance e on a company-wide or individual basis
- They track spending information – to ensure there is always money and guarantee the long-term health of your business
- They maintain a better cash balance – helping you keep money in reserves and making you aware of any cash issues when they arise
- They improve short-term planning – allowing you to adjust your business finances when needed and analyse your history for better forecasting
Final Thoughts
Calculating cash flow statements can seem daunting, but with the help of a financial professional and the formulas shown today, you can gain better insight into your business’s spending, helping you plan for a brighter and more successful future.
Book a free strategy meeting with a business accountant
When you’re still unsure about calculating your cash flow, we recommend booking your first strategy meeting with a professional accountant. Operating cash flow often causes a number of issues for businesses if it’s not calculated correctly, which can put more strain on the business finances and set you up for failure. With our help, cash flow will be just one less thing for you to worry about when running your business, so book a free strategy meeting with Walker Hill to discuss options today!
