How to Calculate Cash Flow for Better Financial Management?

Every small business owner knows that money can make or break their operations, yet cash flow remains a misunderstood topic for many. This lack of understanding leads many business owners to struggle to meet their financial obligations. Studies reveal that poor cash flow management is a leading cause of small business failure.

Did you know almost 45% of U.S. small business owners forego their paychecks due to cash flow shortages? To ensure your business isn't part of this statistic, learning how to calculate cash flow is of great importance.

In this blog, we will cover different concepts of cash flow, highlight its importance, and offer cash flow formulas and ways to calculate it.

Let's start.

Table of Content

1. What is Cash Flow?
2. Understanding Cash Flow: Key Types Explained
3. Fundamental Cash Flow Concepts: Terminology Breakdown
4. What are the Important Cash Flow Formulas You Must Know
5. How Can You Calculate Cash Flow Using a Cash Flow Statement?
6. What is Free Cash Flow?
7. How to Calculate Operating Cash Flow?
8. How to Calculate Cash Flow from Investing Activities?
9. How to Calculate Cash Flow from Financing Activities?
10. What is the Importance of Calculating Cash Flow?
11. Master Cash Flow Calculations for Financial Success
12. FAQs

What is Cash Flow?

Cash flow is the amount of money moving in and out of the organization for a particular period. Usually, organizations generate profit from sales as revenue or cash inflow and spend money on expenses or cash outflow.

The net cash flow is positive when the organization's cash flow exceeds its outflow and turns negative in the opposite situation. With the help of sales reporting software, public companies need to report their respective cash flows on their financial statements. This information on cash flow is greatly important for investors as it showcases the company's financial health.

Understanding Cash Flow: Key Types Explained

Cash flow is like the pulse of a business—it keeps everything moving and healthy. But before learning about cash flow formula, know the various types. Hence, to understand your organization's financial health, it's essential to delve into the key types of cash flow and what they signify.

Fundamental Cash Flow Concepts: Terminology Breakdown

Here are some of the important cash flow statement terminologies as stated below:

• Operating activities: The money involved here is meant for day-to-day operations comprising, cash payments and other financial activities.
• Investing activities: This is related to the cash meant for business investment.
• Financing activities: This amount is generated through capital contributions and business loans.

What are the Important Cash Flow Formulas You Must Know

Here, we provide you with a list of some important cash flow formulas to ease the process of calculating cash flow for your organization.

How Can You Calculate Cash Flow Using a Cash Flow Statement?

With a cash flow statement, you get a better and complete overview of your company's cash inflows and outflows. It also helps you evaluate your business's financial health and operations efficiency.

Here is Costco's cash flow statement for the fiscal year of May 12, 2024. All amounts are in millions of U.S. dollars.

This statement is important for assessing the financial health and the company's operational efficiency.

Cash flow statement formula:

Cash Flow = Cash from operating activities +(-) cash from investing activities +(-) cash from financing activities + beginning cash balance

What is Free Cash Flow?

Free Cash Flow (FCF) is a specific amount generated by businesses after accounting for operating expenses and capital expenditures. It is important for maintaining or expanding the operations of an organization.

This valuable metric showcases an organization's ability to generate surplus cash. This extra cash can be used for various purposes like reinvestment, debt repayment, or shareholder dividends. Having an optimized account payable process plays an essential role in managing cash outflows and striking the balance between cash retention and timely payments.

Unlike net income including non-cash items and accounting adjustments, free cash flow focuses on actual cash inflows and outflows. This makes it a perfect indicator of an organization's financial health and operational efficiency.

How to calculate free cash flow

It is very easy to calculate Free Cash Flow (FCF). All you need to do is subtract capital expenditures from operating cash flow.

Here's the free cash flow formula:

Free Cash Flow (FCF) = Operating cash flow - capital expenditures

Now that you have an understanding of the cash flow basics, let's move on to three important cash flow statement bifurcations discussed below.

How to Calculate Operating Cash Flow?

The term operating Cash Flow (OCF) is meant to measure the money earned from an organization's primary business activities. The main focus of operating cash flow is on operations, rather than on financing or investing activities.

Here's the operating cash flow formula:

Operating Cash Flow (OCF) = Net income + non-cash expenses + changes in working capital

How to Calculate Cash Flow from Investing Activities?

The cash flow from investing activities showcases the cash spent or generated by the organization's investment-related transactions. This cash flow statement comprises the purchase and sale of long-term assets and investments in other businesses.

The formula for cash flow from investing activities:

Cash Flow from Investing Activities = Proceeds from the sale of investments - purchase of investments + proceeds from the sale of assets - purchase of assets

How to Calculate Cash Flow from Financing Activities?

Cash flow from financing activities reflects the inflow and outflow of cash from a company's funding sources, such as issuing or repurchasing stock, borrowing, or repaying debt. This metric provides insights into how a business raises and uses funds to sustain operations and growth.

The formula for cash flow from financing activities:

Cash Flow from Financing Activities = Proceeds from issuance of debt or equity - repayments of debt - dividends paid

What is the Importance of Calculating Cash Flow?

The fundamentals of how to calculate monthly cash flow isn't just estimating numbers—it's about knowing the rhythm of your business. However, learning the importance can change the entire dynamics of your business.

Here's why calculating cash flow is a cornerstone of smart financial management.

Master Cash Flow Calculations for Financial Success

Cash flow is one of the most important aspects of any business, as it paints a clear picture of how the money comes in and goes out of business operations. Understanding ways to calculate cash flow comes in handy to ensure their financial health and make effective plans for the future.

Generally, there are two ways of calculating cash flows - direct and indirect methods. These cash flow methods empower organizations of various scales—small and medium-sized firms to enterprises to identify patterns, address inefficiencies, and optimize financial planning. You can make use of cash flow statements, estimating, and invoicing software to enhance these efforts. Prioritizing cash flow management, helps businesses to not only survive but also grow and lead towards long-term growth.