How to calculate cash flow for your business

Cash flow, or the net balance of money moving in and out of your accounts, is the lifeblood of any business. You need a steady stream of cash flow to keep the lights on, the bills paid and your employees happy. Tracking cash flow can help you understand how money moves through your business and may even help you reduce expenses. Read on to find out how to calculate cash flow for your business.

Why is it important to calculate business cash flow?

There are a variety of reasons you might want to calculate your business’s cash flow. With robust cash flow statement, you can:

• Demonstrate your profitability
• Support your business expansion
• Improve your chances of receiving a business loan
• Ensure your ability to pay for expenses
• Improve your cash management  

Along with your profit and loss statements and balance sheets, your cash flow statement helps paint a picture of your business’s financial health. Measuring your cash flow tells you how much cash your business generates and uses over time. While this offers insight into your ability to fund operations, pay obligations and invest, cash flow alone doesn’t directly measure liquidity or debt-covering capacity. Used in conjunction with other types of reports, your cash flow statement can show how money flows through your business and help you find new ways to improve cash flow strategically.

It's helpful to reference your latest cash flow statement as you review the formulas below. If you don’t have one yet, don’t worry. Learn how to create a cash flow statement for your business here first.

Key components of a cash flow calculation

Before you calculate your business cash flow, it’s helpful to familiarize yourself with some of the terms on your cash flow statement. The types of data contained in your cash flow statement may vary, but most have the same basic elements. Some of the commonly used terms in cash flow formulas include:

• Cash outflow: Total cash going out of the business
• Cash inflow: Total cash coming into the business
• Net cash flow: Total change in a business’s cash balance from the beginning of a period to the end
• Operating cash flow: Money generated from your business’s core operations, like product sales and material costs
• Capital investment expenditures: Cash spent on long-term assets

To create a cash flow calculation, you add up your total cash inflows, or revenue, and subtract your cash outflows, or expenses. The resulting figure is your net cash flow, which helps you better understand what you’re making and spending.

How to calculate cash flow with different formulas

Your cash flow statement contains a treasure trove of metrics that you can use to evaluate the financial health of your business — and that lenders typically use when evaluating your application for a business loan. Here are a few of the most common types of cash flow formulas for small business owners.financial-statements

How to calculate net cash flow

The net cash flow formula is one of the simplest ways of understanding your cash flow. It tells you the difference between how much you spent and how much you earned in a given time period. While this formula can be a good option for businesses with a small number of transactions, it requires strict recordkeeping of receipts and spending, and it doesn’t account for more nuanced financial situations:

• Net Cash Flow = Total Cash Inflows – Total Cash Outflows

Operating cash flow formula

Operating cash flow shows your earnings from normal business operations over a fixed period of time. This calculation tallies your revenue from sales of goods and services and subtracts costs, taxes and interest paid on debts:

• Operating Cash Flow = Net Income + Depreciation & Amortization − Change in Working Capital

Available cash flow formula

This formula shows how much liquidity is available for investors or others to access without affecting the company’s daily operations. More simply, it tells you how much money you can pull out of your pocket and spend without disrupting the flow of your business. It is calculated by taking earnings before interest, taxes, depreciation and amortization (commonly known as EBITDA) and subtracting capital expenditures and changes in working capital:

• Available Cash Flow = EBITDA - Capital Expenditures - Changes in Working Capital

Cash flow forecast

A cash flow forecast can help you predict future cash flow for a set period of time. Consider it a useful tool for planning big purchases, figuring out when to pay back creditors and investors or funding your next big move, like opening a new location or starting a big renovation.

• Forecasted Ending Cash = Beginning Cash + Projected Inflows – Projected Outflows

Tips for avoiding common mistakes in cash flow calculation

Accurate inputs are key to strong financial reporting. Certain financial software and pre-made templates can help you stay organized and moving in the right direction. When in doubt, reach out to an accountant for help. It’s better to get it right the first time.

Tip #1: Classify your transactions correctly.

Cash flow statements are divided into three categories: operating, investing and financing. When you’re first writing your cash flow statement, be sure to put each transaction into the correct category in order to get an accurate result. For example, loan repayments fall under financing, not operations.

Tip #2: Include non-cash transactions.

While they don’t show up in your bank account, non-cash transactions such as depreciation and amortization can play a big role in your cash flow. Non-cash investing and financing activities also need to be included.

Tip #3: Double check your dates.

Cash flow statements capture changes in revenue and expenses over a set period of time. Some businesses do their cash flow statement monthly, while others only do it once a quarter. No matter what interval makes sense for you, make sure that every transaction is from the correct reporting period.

Tip #4: Review and reconcile regularly.

Make a habit of checking your cash flow statement and balance sheet on a regular basis. Your ending cash balance on your balance sheet should match your ending cash balance on your cash flow statement. Investigate any discrepancies if they don’t match.

Choose what’s best for your business

There isn’t a one-size-fits-all approach to calculating cash flow. It’s up to you to determine which cash flow calculation makes the most sense for your unique needs. Calculating your cash flow is just one of many ways to gauge your business’s financial health. For more info on what else you can do to get a fuller picture of your company’s finances, reach out to a Chase business banker.