Cash Flow Calculator: Terms + Examples

Cash flow is something that all businesses need to stay afloat, yet it can be hard to forecast and plan for. Managing your money isn’t always easy—this is where a cash flow calculator comes in handy.

Knowing the terms and understanding example scenarios will help you gain insight into your company’s financial health, giving you peace of mind each month as you calculate how much money is coming in and out.

In this blog post, we’ll discuss what cash flow is, examine the different types and cash flow calculators, their definitions, and some sample calculations to illustrate them—everything you need to start getting a handle on your business finances today!

Cash Flow Calculator

The amount of cash on hand determines whether you can meet your financial obligations. You need cash to pay your employees, purchase inventory, and repay your loans. It’s one of the most important calculations to determine the health of a business.

Cash flow comes from three sources: operations, investment, and financing. Operating cash flow is derived from the day-to-day workings of the business.

Investment cash flow comes from the sale or purchase of long-term assets. Financing cash flow represents funding from investors, creditors, or owners.

Together, these three calculations make up the Statement of Cash Flows.

We will talk about three types of cash flow calculations and how you can use these numbers when running your business.

  1. Free cash flow is net income + depreciation/amortization – change in working capital – capital expenditures.
  2. Operating cash flow is operating income + depreciation – taxes + change in working capital.
  3. Cash flow forecast is beginning cash + projected inflows – projected outflows.

All three of these cash flow numbers will provide different information that will help you understand where your money is coming from and going.

Cash flow is calculated by adding up the money coming into your business and subtracting the money going out of your business. 

Definitions

Before we dive into the types of cash flow and each cash flow calculator, it helps to define a few terms.

Cash at End Of Period

Cash flow is calculated for a specific period, whether monthly, quarterly, or annually. There is a fixed dollar amount of cash on hand at the beginning of the period and a set amount at the end of the period.

The rest of the Statement of Cash Flows calculations is how you get from the first number to the last. If the cash at the end of the period is higher than the cash at the beginning of the period, you have a positive cash flow. If it’s lower, you have a negative cash flow.

We’ll talk more about what these mean in a bit, but suffice it to say if you have a negative number here, you may need to make some adjustments to your business.

Received From Customers

When calculating cash flow, include cash received from customers. This is based on actual receipts rather than money promised due to booked sales.

This number is based on the cash method of accounting, which adds revenue when it is received from the customer, rather than the accrual method, which calculates revenue based on when it is billed.

If a particular customer does not pay, then you don’t have cash on hand. 

Other Cash Receipts

Include any other cash received from any source during the period.

Examples of cash receipts include:

  • fees collected,
  • inventory returned and credited,
  • old debts collected from the customer,
  • deposits returned,
  • and insurance claims.

Some businesses use cash collected from a customer (as opposed to credit payments) as cash receipts.

For Inventory

Cash spent to purchase inventory is a cash outflow. Include only the inventory total cash paid out rather than the money owed to you.

Inventory is often added to the accounting period following the period when it was purchased. If you purchase inventory in June, it will be accounted for on the statement prepared in July. 

While not part of a cash flow statement, it’s helpful to calculate how much you spent on inventory and how much of that inventory was used to generate revenue. To do this, take your beginning inventory, subtract your closing inventory, and then add the amount you spent on new inventory.

One further note is that inventory and supplies are not the same in the accounting world. Inventory is used to create goods and services, while supplies are used in the operation of your company. There is also a significant distinction as you pay taxes on supplies but not inventory.

For Insurance

This number not only includes insurance, but advertising, rent payments, and lease payments.

A business owner can sometimes work with their insurance company to make payments based on cash flow. This method is a win-win for both sides.

The business owner can keep their cash longer and make smaller payments, while the insurance company is more likely to receive payments on time.

If this is not available, your cash flow calculations may have a lump sum payment during one period and no payments during other periods. 

Sale Of Property

If you sold assets, including real estate, tangible assets, or intellectual property, it would be included here—this includes rental property investments.

A tangible asset is an asset in physical form, such as a piece of equipment. It’s also used to drive future economic benefit, depreciate over time, be used as collateral for loans, and hold residual value.

Intellectual property is intangible assets that are not physical in form. Examples include trademarks, patents, copyrights, franchises, trade secrets, and digital assets.

Check with an accountant to see how this appears on a financial statement.

Capital Expenditures

This includes cash used to purchase land or capital equipment. Not every piece of equipment qualifies as a capital expenditure. The life of the asset needs to be over a year and is usually longer.

Capital expenditures cash includes buildings, land, equipment, computers, furniture, vehicles, and patents.

Free Cash Flow Calculator

Calculating free cash flow allows you to see what cash you have available and which is free to use for expenses. It is the difference between cash generated from business operations and cash spent on assets.

Free cash flow is calculated by taking your net income, adding back depreciation and amortization, and deducting changes in working capital and capital expenditures.

  • Net income comes from the Income Statement
  • Depreciation is the value that an asset loses over time. Amortization is a way of breaking down the value of the asset. These are also pulled from the Income Statement.
  • Working Capital comes from the Balance Sheet and is the difference between total liabilities and total assets.
  • Capital Expenditures are funds spent on land, equipment, or real estate. The number can be found on the Statement of Cash Flows.

Free cash flow should be a positive number. That means you have money to spend on expanding your business, hiring new people, or giving yourself a raise. 

Free cash flow is one of the most important numbers to know when operating your business. From your perspective, you can see where your money is going and how much profit you are making.

Investors, lenders, creditors, and business partners love to see a positive free cash flow number. It shows the company’s health and that you can pay your debts, and your company is a good investment.

Keep in mind that free cash flow can fluctuate over time depending on when you purchase inventory, upgrade equipment, pay employees, close new deals, sell assets, or anything else that affects operating cash flow.

A second way of calculating free cash flow is by taking your operating cash flow and deducting capital expenditures.

Operating Cash Flow Calculator

The Statement of Cash Flows also calculates cash flow from operations.

The formula for calculating operating cash flow is to take operating income, add depreciation, deduct taxes, and then add the change to working capital.

Operating income comes from your Income Statement. It takes your total revenue and subtracts operating expenses. (Remember to include your cash dividends paid here!)

While free cash flow is a snapshot of everyday cash flow, it doesn’t consider investments, earnings, or irregular spending. Operating cash flow is a more typical snapshot. 

There are two ways to calculate operating cash flow. The indirect method uses the accrual method, which is based on when a product is ordered, or an expense is invoiced. It’s easy to prepare as the numbers are pulled directly off the Income Statement. Most accountants use the indirect method, but the direct method also provides valuable information.

The direct method uses the cash method, which is based on when the money enters or leaves an account. The direct method is easier to understand because the transactions clearly show where the money is coming from and going. 

Cash Flow Forecast

Operating cash flow and free cash flow both give you a snapshot in time and are based on what has occurred. When planning for the future, you need a cash flow forecast. 

To calculate your cash flow forecast, you need to think ahead to the next 30 or 90 days. Take your beginning cash number from the Statement of Cash Flows, and add the amount of money you expect to bring into the business, including current invoices that have not been paid and invoices that you expect to send and receive payment for. Subtract expenses and payments you expect to have in the same time period.

Determining your future cash inflows and outflows can be tricky. Some revenue and expenses are steady. Perhaps a client pays the same each month. Rent, loan payments, salaries, and sometimes utilities are usually steady. Other amounts can be an average of the past month’s numbers. Other amounts are educated guesses.

Inflows (also known as receivables) include payments made on credit, revenues, grants, loans, and investments—any sales or cash you expect.

Outflows (also known as payables) include monthly rent, your monthly mortgage payment, taxes, utilities, insurance, payroll, inventory, marketing, and other expenses you expect to incur during the next few months.

Once you plug these numbers into a spreadsheet, you can create projections for months down the road. It’s just like a home-based budget, except for your business. From this point of view, you can tell which months you could have abundance and which months you may need to save up for. 

Negative Cash Flow

If your ending cash is lower than your beginning cash, you are said to have a negative cash flow. You might look at this number and start to panic. It may be a bad sign, but you must study individual lines before assuming the worst. 

Sometimes a negative number is a matter of timing. If you purchase a large amount of inventory, upgrade a piece of equipment, or remodel the office, these expenses will show up in one month. They can also be an indication that the company is poised for growth.

It’s prudent to look at several months of cash flow numbers to see if the negative number is a trend. If it happens month over month and there is no apparent significant expenditure or investment, then you have to wonder whether your business model is working.

If you have a negative cash flow, you will want to scrutinize inflows and outflows to determine where you fall short. Then you can strategize how to increase inflows with sales and decrease outflows by cutting costs. 

Positive Cash Flow

The goal of any business is to make more money than they spend. A positive cash flow is the validation of this success. It is achieved when the cash at the end of a period is greater than the cash at the beginning of the period.

But when analyzing your own books or those of another company, it’s essential to look at more than just one number.

Positive cash flow is a good sign of a company’s health but does not necessarily mean that the company is making a profit. Just like with negative cash flow, these numbers need to be looked at over several statements or spanning several time periods. Each number must be scrutinized.

For example, if you just applied for a loan and the money just hit your bank account, this reflects a positive cash flow. If you’re depreciating a lot of equipment, this elevates cash flow. 

Steady positive cash flow with the numbers to back it up can illustrate strong management. 

The Bottom Line

Whether you have an accountant prepare your statements or do them yourself, you must know what the numbers mean. Using various methods to determine cash flow gives you a clear picture of the state of your business.

Use these cash flow calculations to see past inflows and outflows and to be able to plan for the future. 

For more information, click here to learn how to keep more of your money. 

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