Investment and Portfolio Management in USA

How to Calculate Cash Flow and Prepare a Cash Flow Statement

A cash flow statement is about documenting where the money is going in your business and whether you’re making a profit or suffering a loss. Small Business Trends contacted a variety of experts to get the lowdown on how to calculate cash flow and prepare a cash flow statement which combines the numbers from any financing, operations and investing your business does.

It’s important to know how to calculate the cash flow first off. This is a building block and having accurate information here means the final statement will be credible. Christal Bemont, Senior Vice President and General Manager of Global SMB at SAP Concur, weighed in via email to underline how important getting this right is:

Cash flow is the lifeblood of a small business — in fact, a recent study found over 80% of small business failure can be attributed to poor cash flow issues,” Bemont writes.

How to Calculate Cash Flow

Here’s how you can start to put those numbers together into a statement using these three simple to understand formulas.

Operating Cash Flow

This is one of the fundamental formulas that you’ll need to get everything else right. It’s an important number that small business can use to determine if they have enough finances to expand or they need outside help. Simply put, this is the amount of money your business makes from routine operations.

It’s no surprise there is a regulatory framework for this calculation from the Generally Accepted Accounting Principles (GAAP). Ask if they use this if you’re using an accountant. If you’re a smaller business looking to put this together yourself, here’s what you need to know.

Like the name suggests, the operating cash flow takes a look at the numbers from everyday activities. You’ll need to put together the cash flows from financing, operating and investing.

You can use a spreadsheet to get started here, but Chelsea Krause, the Head Accounting Writer at Merchant Maverick, has a suggestion to simplify the process at this early stage.

“ The easiest way to calculate and prepare a cash flow statement is by using cloud-based accounting software. If you are using software like QuickBooks or Xero, you can go into the reports section, click on the Statement of Cash Flows and the software will use your existing data to complete the report. Not only does this save you time, but it also reduces chances of human error,” she writes.

Cash Flow of Investment Activities

Next, you’ll need to consider this. The actual practice of getting this number is simpler than the name might suggest. Krause suggests that you can get this data by simply subtracting cash outflows from cash inflows.

These focus on different kinds of investments and changes in assets that are long-term like when your small business buys or sells equipment or property.

Cash Flow of Financial Activities

This calculation is done the same way as the one above by subtracting cash flows from cash inflows. In this part of the formula these numbers need to relate directly to things like loan payments loans and other financial tools.

From here on in, it’s easy to put together your cash flow statement. Each line should be broken down to show money coming in and money going out line by line so there’s a detailed overview.

Remember when you add the three formulas together, you’ll come up with a number called the net cash flow. If it’s positive, your business is doing well. On the other hand, if that number is negative you’ll need to adjust accordingly.

Ken Stalcup, CPA and senior director with Houlihan Valuation Advisors, has the final word with a suggestion you can use after you’ve been in business for a while.

“The REALLY quick way to calculate total cash flows is to compare the current year cash to the prior year cash. For example, say your business has $100 in cash at the end of the year this year. Last year, your business had $75 in cash. That means you had positive cash flows of $25 for the current year,” he writes.


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