Three Ways on How to Calculate Your Cash Flow
By Space Coast Daily // March 16, 2020
Owning a business requires you to be knowledgeable and skilled in handling your money so you can keep track of how much you earn, spend, and spare for other use.
One important thing that you should be able to provide especially for your investors is the cash flow statement which can be derived from your financial reports.
The cash flow is the total amount of money that’s transferred in and out of your business at any given time. It is important in daily operations as it is what you use to buy expenses, pay bills and taxes, and invest in new assets.
It is fundamental information that gives you insight into the state of your business and finances. There are three ways in which you can calculate your cash flow:
1. Operating Cash Flow Formula
This is your net income combined and the non-cash expenses after the increases in working capital are deducted. This is all the amount of cash being produced by the regular operational activities of your business at specific points in time. This is why it is also called as the cash flow from operations.
This ensures that you earn more money in selling your products that it costs you to produce them. You calculate this to know how much you have profited and that the cash inflow is greater than its outflow.
Computing for the OCF can be done through a direct and an indirect method. The direct method is simple as you only have to subtract operating expenses from the total revenues.
Although it can be easily done and is accurate, it does not provide other insights into the company like the sources of cash and how it is operated.
To know these details, you should use the indirect method. This is a more tedious calculation but an informative one. This method will adjust the net income for changes in all of the non-cash accounts found in the balance sheet.
After this, depreciation and amortization are added again to the net income while being adjusted for the changes in accounts receivable and inventory. It can also be a bit confusing because you essentially convert the accrual net income to a cash basis net income. It is a complicated one but beneficial in knowing more information about the operating cash flow in the company.
2. Free Cash Flow Formula
This is simply the cash from operations minus the capital expenditures. It is the amount of cash that is generated by your business after reinvesting in the current capital assets of your company.
It can be derived from the income statement and the balance sheet if you don’t have a cash flow statement available to find your cash from operations and capital expenditures.
This computation is commonly done and is considered to be one of the most important formulas to calculate cash flow as it tells you how much cash is free and available to use. This is good for making new investments, getting additional employees and paying for new company upgrades.
In order to compute this, you have to add your net income and depreciation or amortization then deduct the change in working capital and your capital expenditure. You can already compute using the formula for free cash flow by substituting the numbers you have.
3. Cash Flow Forecast Formula
This is intended to see your company’s future cash flow. It is estimating the anticipated cash flows in the future which can help you on how to boost your business.
There are numerous advantages in doing this including predicting cash shortages and as proof required by lenders from you. This will help a business make necessary adjustments in the present like cutting expenses and allocating budget. It is one of the easiest calculations to make.
To compute for your cash flow forecast, you just need to add your beginning cash and projected inflows. After this, you deduct the projected outflows which will give you the ending cash.
It’s simply the cash you are expected to bring in and the cash you are expected to spend over the next number of days.
Being a hands-on businessman would demand you to get to know where your money is so you can ensure that you are earning profit given all your day to day operations today and the future.
If you keep an eye to where your money goes using these cash flow formulas, you are able to control where it’s going and how it will be used.
It can save you from a multitude of problems in the future and you can be sure of your company’s health and growth even in the future.
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