The advantages of cash flow management and forecasting are widely known, regardless of the size of your business - and the fact you're here reading this is a great sign! But what many start-ups or entrepreneurs don’t know is how to calculate cash flow in the first instance. What should be included, and what figures do you need to hand?
What is cash flow?
Cash flow is the amount of cash readily available within your business for a specific period of time. Your cash flow takes into account how much available cash is in your business minus the amount of cash required to meet your cash costs.
This gets a little more involved as your business grows and there are some particular parts of your businesses financial health which can easily be overlooked and give an inaccurate view of your cash flow.
Follow our simple steps to help you calculate your cash flow and start implementing cash flow forecasting.
1. Establish your cash flow from operations
Cash flow from operations means the amount of cash you have in your business once you have completed the basic, daily operations of running the business. Some of the main incomes and expenditures which are included in operational cash flow, are shown in the table below.
| Inflow from operations | Outflow from operations |
|---|---|
| Sale of goods or service | Payments to your suppliers for goods or services |
| Cash interest | Salaries to employees |
| Dividends received | Business rates - for example rent |
| VAT and Other Taxes |
(note that equipment purchases don't go here - they're captured as investments in section 3 below)
Simply subtract your outgoings from your income and you will get your cash flow from operations. You'll want to group things by month - that way you'll see tight spots and rich months. (There's no sense going any more detailed - down to weeks for example - this is a forecast after-all, and you'd be kidding yourself to think you can forecast that accurately!). Keep a running total of the amount left-over at the end of each month, so you'll see how much cash you'll have in the bank in any given month.
It is important to monitor your cash flow from operations on a regular basis as these are the factors which are most likely to have an impact on your net cash flow. Operational factors can change quickly, often without notice. The other figures mentioned below are less likely to change without warning and will only change occasionally - but can have an equally big impact.
Another important point to note about operational cash flow is that it may sometimes be affected by factors outside your control. Things like suppliers changing their payment terms, staff and big customers coming and going.
It doesn't take long to tweak your forecast once a month to keep it up-to-date. The benefits can be quite profound - and the impact of not doing it quite scary!
2. Establish your cash flow from financing activities
The second set of figures needed for to calculate your net cash flow are based around the financial activities of your business. This is anything which is linked to the financial activities of the business and can include:
| Inflow from financing activities | Outflow from financing activities |
|---|---|
| Investment funding received | Investments your business makes |
| Loans received | Repayments on Loans |
| Your own cash into the Director's Loan Account | Re-acquisition of equity or shares |
| Dividends paid to shareholders |
Again, simply subtract the amount of cash that leaves your business from the cash which comes into your business via financing activities and you will have a cash flow figure for your financing activities. Keep this figure to hand for later.
3. Establish your cash flow from investment activity
This works in a similar way to step 2 and will normally only apply to larger, more established business but needs to be considered each time you calculate your cash flow to ensure it is accurate.
| Inflow from investment activities | Outflow from investment activities |
|---|---|
| Cash from sale of bonds | Cash paid to acquire debt |
| Cash from sale of assets | Cash payments to buy equity interest |
| Cash from sale of physical property | Money to purchase equipment or assets |
Once the outflow is subtracted from the inflow of cash from these activities you have your final figure which you can then work out your net cash flow from.
4. Put all of these figures into your cash flow
The below table shows you how to use the figures you have just worked out to obtain your overall cash flow.
| Source | Amount in Month X |
|---|---|
| Cash flow from operations | £5,000 |
| Cash flow from financing activities | £1,500 |
| Cash flow from investment activities | £1,100 |
| Total/ net cash flow | £7,600 |
This is a simple cash flow calculation and you can get started in a simple spreadsheet. However, a word of warning: spreadsheets are only as good as the formulae that underpin them. You only need to move a row or column and your whole cascading set of figures could be thrown out without you even realising.
This is why our online cash flow tool is so popular. It's fantastic value and the formulae behind it are bullet-proof and backed-up by automated tests across its calculations. With a proper tool like Finanscapes you can play with your figures and scenarios in comfort, and use the indicators it provides to make smarter decisions about your business.
A final point to make regarding cash flow is the importance to businesses of cash flow forecasting. Now you have an accurate picture of how much cash is in your business at a point in time you can forecast that into the future. The wealth of knowledge you get leaves you in the best possible position to grow your business and make informed decisions while managing your risk.
You can trial our cash flow forecasting tool now, for FREE. Sign in with your social media account and away you go. It really is that easy!
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