How to Calculate Your Business Cash Flow: The Ultimate Guide

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One of the best ways to assess the financial health of your business is by tracking the business cash. Although this can seem like a daunting task at first, having a good system in place can make the process a whole lot easier. Many small businesses have access to a number of automated tools that can track your daily cash flow with ease. However for a new business, a well-organized Excel spreadsheet is all you need to get started to calculate cash flow formula.

What Is Cash Flow?

In its simplest form, cash flow is essentially the total amount of cash going into and out of your business at any point in time. This is also referred to as cash inflow and outflow. Keeping track of this can provide a better understanding of your liquidity position and your overall business health. Having this overview is especially useful if you have taken on additional loans or credit cards to finance your day-to-day expenses.

How To Calculate Your Business Cash Flow?

The cash flow of your business is calculated using a business cash flow statement. This is a financial statement that lists all the cash inflows and outflows of your business over a specified period of time (usually a month.). The basic formula for the total cash flow is:

Cash Flow = Total Cash Inflow – Total Cash Outflow

Now let’s breakdown the equation:

The Total Cash Flow

As the name suggests, cash flow is the total amount of cash coming into and out of the business. This cash falls into three main categories.

Operating Activities– this is the money generated from the day-to-day operations of the business. Alternatively, the money spent on daily operations is also included in this category.

Investing Activities– this is the cash spent on investments in stocks or bonds or the proceeds from the sale of fixed assets.

Financing Activities– This includes payments made to reduce the debt balance in the company or the dividends distributed to the shareholders (in the case of a publicly held company).

The total amount in all three categories is the Net Cash Flow. For most small businesses the business cash flow will fall into the operating or investing activity categories.

Cash Flow Example

Let’s calculate the net cash flow of XYZ Company to get a better understanding of how the cash flow process.

Total Operating Cash Flow

This is the total cash flow from running your business and can include:

Cash from the sale of services- $70,000 (inflow)

Rent- $50,000 (outflow)

The total operating cash flow = $70,000 – $50,000 = $20,000

Total Investing Cash Flow

This is money spent or received from long-term or short-term investments:

Sale of machinery- $120,000

Purchase of computer equipment- $90,000

The total investing cash flow = $120,000 – $90,000 = $30,000

Total Financing Cash Flow

This is the money spent or received from financing your business and can include:

Cash received from investors- $250,000

Loan payment- $55,000

The total financing cash flow = $250,000 – $55,000 = $195,000

The sum of all three cash flows categories is the Total Cash Flow:

Total Cash Flow = Total Operating + Total Investing + Total Financing Cash Flow

= $20,000 + $30,000 + $195,000 = $245,000

The Net Cash Flow will also include the Opening Balance- that is the cash flow balance from the previous period. For example, the Opening Balance is $30,000

Net Cash Flow = Opening Cash Flow + Total Cash Flow

= $30,000 + $245,000 = $275,000

If you are using an Excel spreadsheet categorize your expenses based on the three types of cash flow. Then track your daily expenses by adding the inflows and subtracting your outflows. At the end of the month add the totals to the opening balance to calculate the total cash flow for the month.

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The Bottom Line On Business Cash Flow

The cash flow statement is one of the key statements in managing the finances of your business. The other two statements are the Profit and Loss statement and the Balance Sheet. Keeping track of the cash flow is crucial to the overall success of your business. The process can help identify any expenses you can cut back on while allowing you to forecast for your future cash flow. Business owners can use the information to make more informed decisions and avoid costly mistakes.

The formula for your forecasted cash flow will look something like this:

Opening balance + Projected Cash Inflow – Projected Cash Outflow = Total Forecasted Cash Flow

The process of tracking your cash flow is a small step but an important one. As your business grows, you can even enlist the help of cash flow software or an accountant to help you manage your finances.

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