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.
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 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 (%):
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.
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.
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.
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
💡 Tips for Increasing Profit Margin
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).