How to calculate cash flow?

Cash flow is an essential financial metric since it reflects how cash, the lifeblood of any business, moves in and out of a company. Tracking and calculating cash flow helps a business understand how well it's meeting its financial obligations, if it is likely to be able to pay upcoming bills, and if growth plans are on track. It is also an important tool for benchmarking how a business is doing against other similar companies.

Regularly calculating cash flow also provides critical advance notice of impending cash flow tight spots in time to address them. This is important, since most businesses, even profitable ones, experience cash flow issues at some point. Cash flow problems can stall momentum, damage credit, tarnish business reputation and imperil company viability.

Knowing how to calculate cash flow helps businesses make smarter decisions, support growth, and avoid running out of funds when it matters most.

Tracking cash flow

The question "How to calculate cash flow?" has two answers. Businesses can use either a cash flow statement, which shows what has already happened in the past, or a cash flow projection (also referred to as a cash flow forecast) to estimate what is ahead. Both of these documents are an important part of cash flow management and show how cash is moving in and out of a business.

Some businesses routinely create both documents, while others use projections more frequently for cash flow management and only create cash flow statements as needed.

Cash flow statement (historical) uses

• Accounting and compliance. Financial reporting, tax filing and audits.
• Applying for financing or presenting to investors. Potential lenders or investors may assess creditworthiness by viewing past cash flow.
• Business decision-making. Understanding the current situation and trends in a company's ability to pay bills, invest in growth and meet financial commitments.
• Benchmarking. Comparing actual cash flow numbers over time, before and after a company initiative, or even against other companies to see how quickly they collect payments.

Cash flow projection (forecasted) uses

• Planning and budgeting. Forecasting upcoming needs, identifying potential shortfalls and informing operational decisions.
• Applying for financing or presenting to investors. Potential lenders or investors may assess creditworthiness by viewing future cash flow projections.
• Managing cash day to day. Seeing how well cash flow is meeting obligations.
• Business decision-making. Estimating upcoming ability to pay bills, invest in growth and meet financial commitments.
• Planning for different outcomes. Creating best- and worst-case cash projections can help businesses avoid surprises and plan for various scenarios.

A related cash flow calculation is "free cash flow," a metric that paints a clear picture of the actual cash your business has on hand after covering expenses and necessary investments

Understanding and using cash flow calculations

Whether a business is preparing a cash flow statement (historical) or a cash flow projection (forecasted), understanding some simple definitions and a formula may help.

Key definitions involved in calculating cash flow:

• Operating cash flow: Money generated from your core business activities, including sales revenue minus day-to-day operating expenses.
• Investing cash flow: Cash spent on or received from buying and selling assets, like equipment or property.
• Financing cash flow: Cash received from or paid to lenders and investors, for example, loan proceeds, repayments, or dividends.
• Net cash flow/total cash flow: The amount of cash a business has left after covering all expenses during a specific time period.

The basic formula to calculate net/total cash flow (whether historical or projected) is:

Operating Cash Flow + Investing Cash Flow + Financing Cash Flow = Total (Net) Cash Flow

Step-by-step cash flow calculation instructions

For a cash flow statement, a business uses actual numbers; for a projection, it uses estimates.

1. Choose a timeframe

Pick the previous 3, 6, or 12 months for a cash flow statement or an upcoming timeframe for a projection.

2. Calculate operating cash flow

Add up all cash from sales and subtract operating expenses like rent, payroll and supplies.

3. Calculate investing cash flow

Add cash received from selling assets and subtract cash spent on equipment or property.

4. Calculate financing cash flow

Add loan or investor funds received and subtract repayments, loan principal or owner withdrawals.

5. Calculate total (net) cash flow

Add operating, investing, and financing cash flows together.

Doing it right: Cash flow calculations tips

One essential tip for calculating cash flow is to do it consistently. Even thriving companies can experience cash flow crunches that may negatively impact vendor relationships, business reputation, business credit and financial viability. Knowing how to calculate cash flow may help you take steps to avoid a cash flow crisis.

Some common mistakes may limit the value of cash flow calculations.

Take a look at some frequent errors businesses make, plus tips to help avoid them, so these calculations can support business growth.

Mastering cash flow calculations for financial success

Calculating cash flow helps a business meet its financial obligations and assess its growth prospects. Backward-looking cash flow calculations via a cash flow statement reveal how cash is moving through a business and where improvements can be made. A future view from a cash flow projection can help avoid cash flow crunches which slow momentum and imperil business growth. Cash management tools can ease the process of tracking, calculating and managing cash flow so a business can make informed decisions.

Ready to take your business to the next level? Citizens is here to help with cash management solutions to help facilitate cash flow and keep your day-to-day business operations running smoothly.