Key Takeaways
- Cash flow reflects the inflow and outflow of cash, providing insights into its financial health and sustainability.
- Cash flow from operating activities reflects cash generated or used in day-to-day business operations.
- Cash flow from investing activities tracks cash flow from buying or selling assets.
- Cash flow from financing activities represents cash flows related to debt and equity financing.
Introduction
You are likely familiar with the phrase, “Cash is the lifeblood of any business.” Every business must have a clear understanding of the cash it needs versus the cash available to ensure smooth business operations. Cash flow helps you gain insights into the cash coming and going out of your business, enabling you to leverage cash properly and make informed business decisions.
Many businesses start strong by having a solid business plan, offering quality products and services, having enough capital, and hiring a skilled team. Nevertheless, eventually, numerous of these companies encounter difficulties, specifically those concerning cash flow problems. The origins of these issues typically lie in ineffective cash flow management or a limited understanding of cash flow.
How can you, as a business owner and key stakeholder, prepare to tackle these challenges? This blog will discuss the significance of calculating cash flow and provide practical examples to guide you in calculating net cash flow effectively.
What is the Cash Flow Formula?
Cash flow pertains to the overall cash movement in and out of your business. Cash inflow is money received from sales, investments, or financing, while cash outflow is money spent by the business. By monitoring and analyzing these cash flow components, businesses can optimize cash usage, ensure liquidity, and enhance long-term value.
Net Cash Flow = Total Cash Inflows – Total Cash Outflows
The first step in calculating cash flow involves preparing a cash flow statement, which summarizes a business’s cash inflows and outflows over a specific period. Typically, a financial statement includes three parts: cash flow from operations, investments, and financing. This is the analysis of each category:
Cash flow from operating activities
Cash flow from operating activities indicates the cash earned or used in the company’s main business activities. This includes cash payments, revenue generation, paying expenses, and funding working capital. It measures the ability of a company to generate cash from its core business operations.
Cash flow from investing activities
Cash flow from investing activities measures the cash generated or spent on investments in assets such as property, equipment, or technology. It reflects the changes in a company’s long-term investments and capital expenditures, providing insights into its growth and strategic decisions.
Cash flow from financing activities
Cash flow from financing activities measures the cash inflows and outflows related to a company’s financing activities. Financing activities may include borrowing, repaying debt, issuing or repurchasing stock, and paying dividends. It provides insights into how a company raises capital and manages its financial structure.
How to Calculate Cash Flow Using a Cash Flow Statement?
Calculating cash flow using the cash flow statement provides a comprehensive view of the company’s cash inflows and outflows, crucial for assessing its financial health and operational efficiency. Let’s understand how to calculate cash flow using a cash flow statement with an example:
Let’s take a look at the cash flow statement of Amazon’s 2023 annual report. To calculate cash flow using the cash flow statement, the first step is to look for cash flow from “Operating Activities”, “Investing Activities” and “Financing Activities”. After that, we need to follow these steps:
- Start with the “cash flow from operating activities” section, which typically includes net income adjusted for non-cash expenses and changes in working capital. Now, determine the total cash flow from operating activities.
- Next, add or subtract the “cash flow from investing activities” such as the purchase of property and equipment, acquisitions, and proceeds from the sale of assets.
- Then, determine the “cash flow from financing activities” by adding or subtracting cash flows from repurchasing stocks and repayment of debts.
- Sum up the cash flows from operating, investing, and financing activities to get the total cash flow for that accounting period.
Total cash flow = Cash flow from operating activities + Cash flow from investing activities + Cash flow from financing activities
For example, for the accounting period of 2023, we can determine the cash flow for Amazon as follows:
Cash flow from operating activities = $5.4B
Cash flow from investing activities = $5.4B
Cash flow from financing activities = $1.4B
Total cash flow = $12.2B
How to Calculate Cash Flow From Operating Activities?
To calculate cash flow from operating activities:
- Start with net income/profit from the income statement.
- Adjust for non-cash items like depreciation and amortization.
- Consider changes in working capital (A/R, A/P & inventory).
- Include other operating cash flows like interest received/paid and income taxes paid.
Cash flow from operating activities = Net income + Non-cash expenses +/- Changes in working capital
Where,
Net income is the total revenue of the company minus all expenses, taxes, and other costs incurred during a specific period.
Non-cash expenses are the expenses that are recorded in the income statement but do not involve the actual outflow of cash during the period (depreciation, amortization).
Working capital is the difference between a company’s current assets and current liabilities.
Let’s consider company ABC’s financial data for the period as follows:
Net income = $100,000
Depreciation expenses = $20,000
Changes in working capital = $6,000
Cash flow from operating activities = $100,000 + $20,000 – $6000
Cash flow from operating activities = $114,000
How to Calculate Cash Flow From Investing Activities?
To calculate cash flow from investing activities:
- Account for cash inflows and outflows from investments in long-term assets.
- Include cash received from asset sales and cash paid for asset purchases.
- Consider loans made to or received from others.
Cash flow from investing activities = CapEx − Purchase of marketable securities − Business acquisitions + Proceeds from the sale of investments + Proceeds from the sale of non-current assets
Where,
CapEx is the fund used by a company to acquire, upgrade, or maintain physical assets such as property, buildings, or equipment.
Marketable securities are liquid financial instruments that can be quickly converted into cash at a reasonable price.
Proceeds from the sale of investments are the cash received from selling financial investments like stocks, bonds, and other securities.
The negative signs before CapEx, purchase of marketable securities, and business acquisitions indicate cash outflows, while the positive signs for proceeds indicate cash inflows.
Let’s consider company ABC’s financial data for the period as follows:
Capital Expenditures (CapEx): $500,000
Purchase of Marketable Securities: $300,000
Business Acquisitions: $1,200,000
Proceeds from the Sale of Investments: $400,000
Proceeds from the Sale of Non-current Assets: $150,000
Cash flow from investing activities = $500,000 − $300,000 − $1,200,000 + $400,000 + $150,000
Cash flow from investing activities = -$450,000
How to Calculate Cash Flow From Financing Activities?
To calculate cash flow from financing activities:
- Include cash inflows and outflows related to financing.
- Account for cash received from issuing equity or obtaining loans.
- Include cash paid for dividends, loan repayments, or share buybacks.
Cash Flow from Financing Activities = Debt Issuances + Equity Issuances − Share Buybacks − Debt Repayment − Dividends Paid
Where,
Debt issuance is the funds raised by a company through the issuance of bonds or taking on loans.
Equity issuance is capital obtained by a company by issuing new shares of stock.
Share buyback.
Dividends are the repurchase of a company’s own shares from the marketplace, reducing the number of outstanding shares.
Debt repayment is the outflow of cash used to pay back borrowed funds such as loans or bonds.
The negative signs before share buybacks, debt repayment, and dividends paid indicate cash outflows, while the positive signs denote cash inflows.
Let’s consider company ABC’s financial data for the period as follows:
Debt Issuances: $1,000,000
Equity Issuances: $500,000
Share Buybacks: $200,000
Debt Repayment: $700,000
Dividends Paid: $150,000
Cash flow from financing activities = $1,000,000 + $500,000 − $200,000 − $700,000 − $150,000
Cash flow from financing activities = $450,000
Why is Calculating Cash Flow Important?
Cash flow provides invaluable information about a company’s financial performance, stability, and ability to create value for stakeholders. Calculating cash flow is important for several reasons:
-
Liquidity management
Businesses can make sure they have enough cash available for operational expenses, investments, debt repayment, and growth opportunities by monitoring and predicting cash flows. Efficient cash management prevents cash deficits, enhances liquidity, and guarantees the seamless operation of the business.
-
Financial stability
Cash flow analysis provides valuable insights for financial planning. Businesses can forecast future cash inflows and outflows, enabling them to create accurate budgets and make informed decisions. It helps anticipate potential cash shortfalls or surpluses, allowing businesses to take proactive measures to address them and maintain financial stability.
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Improved decision-making
Cash flow information guides stakeholders in investment and financing decisions. Businesses can evaluate the financial feasibility of investment opportunities by considering the expected cash inflows and outflows associated with the investment. Similarly, businesses must assess the impact of loan payments or interest expenses on cash outflows when considering financing options. Businesses can make sound investment and financing choices aligned with their cash flow capabilities by analyzing the cash flow implications.
-
Business performance analysis
Cash flow analysis provides valuable insights into a business’s financial health and performance. Having a positive cash flow means that a company brings in more money than it uses, showing that its operations are typically healthy and can be maintained over time. However, a cash flow deficit could suggest financial difficulties or the necessity to make changes to enhance profits or control costs.
How Can HighRadius Help in Improving and Managing Cash Flow?
Cash flow plays a crucial role when it comes to ensuring financial stability for a business. To get granular visibility into cash flows, organizations must have the capability to accurately track and record all cash inflows and outflows. HighRadius Cash Management Module helps with
- Real-time bank data access with API support, versatile formats, and imports.
- Centralized bank balance analysis across multiple accounts with custom view and data exploration.
- Focus on making decisions, not building cash positions manually.
Additionally, HighRadius Cash Forecasting Module provides:
- Improved forecast accuracy and prediction rates with custom data science models by AI/ML algorithms.
- Automated best-fit model selection by intelligent forecast engine analyzing historical data.
- Automatically generated recurring forecasts using a user-defined forecasts model.
FAQs
1) How to calculate cash flow to stockholders formula?
To calculate cash flow to stockholders, you need to subtract dividends paid from the net income and add any increase in equity. The formula is: Cash flow to stockholders = Net income – Dividends paid + Increase in equity.
2) How to calculate discounted cash flow Excel formula?
You can use the net present value (NPV) function, to calculate the discounted cash flow (DCF) in Excel. Here’s the formula: `=NPV(rate, cashflow1, [cashflow2, ….]) with the rate being the discount rate or required rate of return, and cash flow 1, cash flow 2 representing a series of cash flows allocated to different periods.
3) What is the annual operating cash flow formula?
The formula for annual net operating cash flow is:
Annual operating cash flow = Net income + Non-cash expenses + Changes in working capital. Net income is the total profit or loss, non-cash expenses include depreciation, and changes in working capital represent adjustments for current assets and liabilities.
4) What is the basic formula for global cash flow?
The global cash flow assesses a borrower’s capability to produce sufficient cash flow to meet all debt obligations, encompassing income sources outside of their main business activities. The basic formula for global cash flow is: Global cash flow = Net operating income + Non-operating income – Total debt
5) How to calculate cash flow from assets?
Cash flow from assets = Operating cash flow – Net capital spending – Changes in working capital
where
Operating cash flow: Net income + Depreciation + Amortization
Net capital spending: Ending net fixed assets – Beginning net fixed assets + Depreciation
Changes in working capital: Ending working capital – Beginning working capital
