How To Calculate Cash Flow

How To Calculate Cash Flow

This article will cover everything from calculating your cash flow to tips for making sure that your company's finances are in or above the black.

If you are a business owner, understanding your cash flow is very important. Cash flow can be calculated in many different ways, and the most common way is to calculate it by how much money you have coming in versus a specific time frame.

How To Calculate Cash Flow

What Is Cash Flow?

Cash flow is a measure of how much cash you have coming in and going out over specific periods of time, typically months or quarters. It's important for business owners to understand their company's finances. If you don't know what your cash flow looks like, then it can be difficult to run successful operations on a day-to-day basis.

Calculate Your Company's Cash Flow

There are many different ways to calculate your company's cash flow, but the most common way by far is subtracting expenses from income over a set period of time (usually one month).

For example, let's say that during January 2018 your company earned a total income of $100,000 and spent a total expense of $90,000. You would calculate your company's cash flow by subtracting the expense from the income to get a net result of -$30,000.

How To Calculate Cash Flow

How to Create a Cash Flow Forecast

A cash flow forecast is a simple formula based upon the addition of starting cash and projected inflow (income) subtracted by projected outflow (expense). This is a great way to help your company plan by having a projection to come back and view for reference.

In more detail, here is how a cash flow forecast is created.

Step One: To calculate the total amount of expenses, add together last month's monthly revenue per expense category (i.e., sales staff wages).

Step Two: Next, multiply that number by 12 to get an idea of what it will cost for those next twelve months if things don't change with current trends moving forward.

Once you've done this on all relevant expense categories, take the sum total from each one and then divide that figure by 12. This will give you the projected annual costs related to these different areas or functional departments within your company.

Step Three: Finally, take the sum total from these costs and subtract it from your projected annual revenue. This will give you an idea of how much money is left over after all expenses are paid.

This figure can be used to help with decision-making when deciding between projects or whether a new project would bring in enough profit to cover its own operating costs, which could include additional staff wages.

Discounted Cash Flow Formula

The following steps can be used to determine the total value of a company's assets. In other words, what it would cost for an outside party to purchase all that your company has going.

Step One: Use this formula in order to calculate how much cash is needed at any given time (i.e., "C"). The calculations should take into account both long and short term investments as well as anything else which may need funds regularly such as payroll or financing commitments.

Step Two: Next, use these formulas when calculating future cash inflows from operations or investments; projected revenues are typically calculated using periodic growth rates (%):

  • "FV = PV(%/n)^n"
  • "PV = FV / (%/n)^n"

This will give you the total projected value of your company, which can be used for many different purposes such as determining if a current investment or project is worth pursuing.

Operating Cash Flow Formula

The Operating Cash Flow Formula can be used to determine how much cash is generated by a business in order to meet its day-to-day operating costs.

Step One: Start by calculating the total gross profit margin and increasing this number with any other revenue streams such as interest or capital gains.

Step Two: Next, subtract any additional expenses which may come from interest payments or other ongoing costs for financing.

Finally, take the sum total of these numbers and divide it by your company's annual revenue. This will give you an idea of how much money is generated on a monthly basis to meet this business' operating needs.

This figure can then be used in conjunction with the discounted cash flow formula above to determine whether certain investments are worth pursuing if they'll help generate more income at some point down the line.

How To Calculate Cash Flow

Why is Calculating Cash Flow Important?

Cash flow is important when it comes to making decisions about where your company should allocate resources (i.e., which ones need better marketing, more staff members, etc). Cash flow is also an essential part of understanding how much money will be available at a given time from sales.

What is a Positive Cash Flow?

If you are looking at your positive cash flow as an indicator of how much money is coming in versus how much is going out during one month or quarter, then it means more money was taken in than was spent (i.e., if there's a "net" number).

For example, let's say that during January 2018 your company earned a total income of $100,000 and only had total expenses totaling up to about half (50k) so far this year, you'd end up with a net cash flow of $50,000.

How To Calculate Cash Flow

Benefits to Calculating and Monitoring Cash Flow

An important benefit of calculating your company's cash flow is that you can use it as a metric for how successful or unsuccessful your business has been. If this number stays positive, you know that you have enough funds to keep operating without shortage.

However, if this number starts going negative, there may be an issue with either sales or expenses that should be addressed so they don't grow out of control.

Monitoring also allows businesses to make adjustments before they get behind on their bills or find themselves lacking sufficient money to pay people who work at the company. This way companies can avoid any financial difficulties down the line as soon as identified.

Your company will be able to catch up on bills without any late fees being incurred and keep employees happy by continuing with a great work ethic and high morale.

Great Tips for Making Sure Company Finances Are In Order

Tip 1: Monitor Cash Flow

Remember to monitor your cash flow during the month and take note if you are seeing a negative number. This will help you identify where adjustments need to be made so that next time your company has sufficient funds available.

If this continues for more than one month, it is important that you contact an accountant or business consultant as soon as possible in order to find out how best to increase revenue streams.

Tip 2: Book-keeping

Keep track of which bills have been paid and when they were due every day (or at least twice per week). By doing this regularly, companies can stay on top of their expenses without forgetting to pay any of their bills.

Tip 3: Create a System

Another way to make sure your company's finances are in order during day-to-day operations is to set up a system where everyone involved knows who will be paying for expenses and when they need to do so. (i.e., don't allow people other than yourself or those designated as bill payers).

This can help companies avoid any issues by making these important decisions together instead of allowing employees to spend money without thinking about what needs to get done on their own.

How To Calculate Cash Flow

What Should I Do If My Company Is Experiencing Cash Flow Problems?

If during this process you identify areas where there are low-profit margins and high costs associated with those products/services, it may be beneficial for your company to consider scrapping or redoing some of your offerings in order to try and increase those profit margins.

Tips to Decrease Expenses

  • Consider outsourcing some tasks like accounting services for tax refunds or insurance claims if there resources aren't needed by other employees (i.e., if you don't have any staff members who are qualified to do these tasks, consider hiring a consultant).

Tips for Increasing Profit Margin

  • Increase the number of sales by giving discounts on products that have already been sold before (i.e., if you sell clothing, then offer 20% off a second item).
  • Ask current customers to refer their friends/families as potential new clients. This can be done through social media posts, sending out surveys asking people about how they would like to receive updates from your company, etc.
  • Promote what kind of deals are available with coupons posted online and distributed at high traffic areas within stores (i.e., mails). You could also promote these same offers on social media platforms.
  • Consider using coupon codes for loyalty customers. These are valuable because they will help build a customer base and increase your company's revenue streams. This can also be done through social media posts, flyers at stores in high traffic areas (i.e., malls, etc).
How To Calculate Cash Flow

Calculating Your Company's Net Worth

Categorize all current assets and liabilities as either fixed assets or current, these two forms represent different things on a balance sheet.

To figure out net worth, you'll want to subtract total liabilities from shareholders equity, then divide by everything in shareholders equity to find your net worth percentage.

What You Need To Know About A Balance Sheet

The balance sheet is a snapshot of the company's financial situation at any given period in time. A balance sheet will show what your current assets are, what liabilities there are as well as shareholders' equity (which represents how much money you have available from sales or other sources).

How To Build A Cash Flow Model

The following steps will break down how to create a model where all the right numbers and formulas have been accounted for, which will allow you to calculate profits from sales as well as any other income streams (i.e., investments).

Step One: Create column titles at the top of your spreadsheet such as "Income" and "Expenses".

Step Two: Under the income column, create a formula to calculate last month's sales as well as any other sources of revenue. Next, under expenses, make sure that you're including all costs related to your company (i.e., paying employees).

Concluding Notes

  • When making decisions about where resources could be allocated within your company, cash flow can help identify whether investing more into an area with little revenue potential would yield high returns for those who still remain loyal customers.
  • Investing more heavily here would be wise if the company has a high number of customers who are still loyal to that particular product or service.
  • When calculating cash flow, pay attention to expenses as well. These can often lead directly back to lost revenue streams without negatively impacting them too much. This is either accomplished by reducing sales (i.e., employees) or finding other ways to cut costs while maintaining customer satisfaction levels.
  • It's important also not only on deciding what new projects should take precedence over others within your own company, but also understanding how your company would be able to maintain profitability if other companies in the same industry were to experience a downturn.
  • Making decisions based on cash flow is important because it can help you make sure that there are enough funds available when they're needed for an emergency situation.

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