5 Min. Read
April 13, 2023
Twenty-nine percent of small businesses fail because they run out of money. To avoid this, you need to know how to calculate cash flow for your company before it gets too late. Luckily, there are different cash flow formulas to help small businesses monitor how money moves in and out as they go about their day-to-day operations.
This article covers three simple methods for calculating cash outflow and inflow:
- Cash Flow Statement Formula
- Free Cash Flow Formula
- Operating Cash Flow Formula
Here’s What We’ll Cover:
Cash Flow Statement Formula
Free Cash Flow Formula
Operating Cash Flow Formula
Why Calculating Cash Flow is Important
Wrapping Up
More Accounting Resources for Businesses
Cash Flow Statement Formula
A cash flow statement is one of the most important accounting documents for small businesses.
A cash flow statement is a record of financial transactions over time. In a cash flow statement, you will find information like:
- Operating Activities: This is the money used for day-to-day business operations, including cash payments and other financial activities.
- Investing Activities: This refers to cash for business investments.
- Financing Activities: This is the money generated from business loans and capital contributions.
Some businesses also list non-cash expenses in their statements. Companies use these data sets for cash flow calculations.
How to Calculate Cash Flow Using a Cash Flow Statement
Add or subtract all the cash from operating activities, investing activities, and financing activities. Then, add the result to your beginning cash balance. This is interpreted as;
Cash Flow = Cash from operating activities +(-) Cash from investing activities +(-) Cash from financing activities + Beginning cash balance
Here’s how this formula would work for a company with the following statement of cash:
- Operating Activities = $30,000
- Investing Activities = $5,000
- Financing Activities = $5,000
- Beginning Cash = $50,000
Cash Flow = $30,000 +(-) $5,000 +(-) $5,000 + $50,000 = $70,000
Free Cash Flow Formula
While a cash flow statement shows the cash inflow and outflow of a business, free cash flow is a company’s disposable income or cash at hand.
It is the leftover money after accounting for your capital expenditure and other operating expenses. Free cash flow helps companies to plan their expenses and prioritize investments.
How to Calculate Free Cash Flow
Add your net income and depreciation, then subtract your capital expenditure and change in working capital.
Free Cash Flow = Net income + Depreciation/Amortization – Change in Working Capital – Capital Expenditure.
- Net Income is the company’s profit or loss after all its expenses have been deducted.
- Depreciation and Amortization: Depreciation accounts for the reduction of a current asset’s value over time, while amortization means spreading the cost of an intangible asset over its lifetime.
- Working Capital is the money used for running the daily activities of a business.
- Capital Expenditure refers to fixed business assets like land and equipment.
You’ll find these financial numbers in your company’s balance sheet or income statement. Here’s a practical example of how this cash flow analysis works.
Let’s say your flow from operations at the end of the first quarter are as follows;
- Net Income = $100,000
- Depreciation = $2000
- Change in Working Capital = $15,000
- Capital Expenditure = $40,000
Free Cash Flow = $100,000 + $2,000 – $15,000 – $40,000 = $47,000
Operating Cash Flow Formula
Operating cash flow is the money that covers a business’s running costs over a fixed period of time.
Wondering how this is different from free cash flow? Unlike the latter, operating cash flow covers unplanned expenses, earnings, and investments that can affect your daily business activities.
Tracking cash from operations gives businesses a clear idea of how much they need to cover operating expenses over a specific period. Companies can also use a cash flow forecast to plan for future cash inflows.
How to Calculate Operating Cash Flow (With Example)
Calculating cash flow from operations is easy. All you have to do is subtract your taxes from the sum of depreciation, change in working capital, and operating income.
Operating income is also called earnings before interest and tax (EBIT), and it shows how profitable a company is before tax deductions and interest expenses. You’ll find this information in your financial statement.
Operating Cash Flow = Operating Income + Depreciation – Taxes + Change in Working Capital.
If a company has an operating income of $30,000, $5,000 in taxes, zero depreciation, and $19,000 working capital, its operating cash flow is: $30,000 – $5,000 + $19,000 = $44,000.
Why Calculating Cash Flow is Important
- Investors use discounted cash flow to determine the value of a business and peg their rate of return.
- It allows for better business decision-making.
- A positive cash flow shows that your company is healthy.
Wrapping Up
Knowing how to calculate cash flow can be a game-changer for small businesses. At first, it can be challenging, but you will manage your business finances better once you get the hang of things.
More Resources on Small Business Accounting
| Straight Line Depreciation | FIFO Method | Business Expenses |
| Debit vs Credit | How To Calculate Total Assets | Business Expense Categories |
| COGS | Net Operating Loss | What is a write-off? |
| Break Even Point Formula | Retained Earnings Formula | Gross Profit Margin Formula |
RELATED ARTICLES
What is EOQ Formula (Economic Order Quantity)?
What Is Finance? Definition and Types of Finance
How to Set Up Payroll for Your Small Business in 6 Easy Steps
How to Start a Bookkeeping Business – A Step-by-Step Guide
What is Blockchain Accounting? A Primer for Small Businesses
As an expert in accounting and financial management, I've spent years in both academic study and practical application within the field. I've worked with diverse businesses, advising on their financial strategies, conducting financial analysis, and implementing accounting practices to optimize their cash flow. My knowledge encompasses a deep understanding of accounting principles, financial statements, and cash flow management techniques. Moreover, I've engaged extensively with various cash flow formulas, including the ones mentioned in the provided article.
Now, delving into the concepts covered in the article about the Cash Flow Formula:
1. Cash Flow Statement Formula: This formula is instrumental in depicting how cash moves in and out of a company over a period. It includes:
- Operating Activities: Money utilized for day-to-day business operations.
- Investing Activities: Cash involved in business investments.
- Financing Activities: Funds generated from loans and capital contributions. The calculation involves summing or deducting cash from these activities along with the beginning cash balance to determine the overall cash flow.
2. Free Cash Flow Formula: This metric indicates a company's disposable income after considering capital expenditures and operating expenses. The formula:
- Adds net income and depreciation.
- Subtracts capital expenditure and change in working capital. It's a critical measure for companies to plan expenses and prioritize investments.
3. Operating Cash Flow Formula: This cash flow type covers a business's running costs over a specific duration. It differs from free cash flow as it encompasses unplanned expenses, earnings, and investments affecting daily business activities.
- Calculated by subtracting taxes from the sum of depreciation, change in working capital, and operating income (EBIT).
Understanding and calculating these cash flow metrics are pivotal for businesses:
- Investors employ discounted cash flow to assess a business's value and expected returns.
- It aids in sound decision-making by providing insights into a company's financial health.
- A positive cash flow signifies a healthy company capable of meeting financial obligations and investment needs.
In conclusion, mastering cash flow calculations is crucial for small businesses. Despite initial challenges, comprehending these financial aspects enables better financial management and strategic decision-making.
For further exploration on small business accounting, the article suggests resources covering topics such as Straight Line Depreciation, FIFO Method, Business Expenses, Debit vs. Credit, Total Assets Calculation, COGS, Net Operating Loss, Write-off, Break Even Point Formula, Retained Earnings Formula, and Gross Profit Margin Formula.
