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How to Calculate Cash Flow?




Cash flow is the lifeblood of business. The way you manage the cash flow will define the success of your business. If managed well, it will help you to create more cash cushion that is essential for business growth. On the other hand, if not managed efficiently, it will be the major reason for the failure of business due to insufficient funds.

To define cash flow, it is a statement that summarizes the change in the cash position i.e. inflow and outflow of cash and cash equivalents. Read Cash Flow: What is Cash Flow Statement Definition and Example to know more.

If your cash inflow is more than the outflow, it is positive cash flow.  If the cash outflow is more than the inflow, it is called negative cash flow and indicates that the business will run out cash on a longer run.  

To know and measure whether the cash flow has positively impacted the business, you need to calculate the cash flow. There are different formulas and method to calculate cash flows as detailed in the next section.

To calculate cash flow, you can either apply the direct method or the indirect method. Each method uses different formulas to calculate cash flow.

Direct method of cash flow calculation

Under the direct method of cash flow, the gross cash outflow and inflow of business operations are considered to arrive the net cash flow. The cash inflow i.e. cash receipts from sales, accounts receivables etc. are reduced with the cash outflow made towards various expenses like rent, salary, accounts payables etc.  The remaining balance is the net cash flow.

Here, all non-cash aspects like depreciation, bad debts etc. are not included.

Let us understand how to calculate cash flow using the direct method with an example.



Indirect method of cash flow calculation

To calculate cash flow using an indirect method, the net income is adjusted with all non-cash-items.  Here, an increase in the asset is reduced from net income and an increase in liability is added back to net income.

Under this method, the cash flow is divided into three sections – operating, investing, and financing activity. For each section, the net cash flow is arrived after making the suitable adjustments


Rules for calculating cash flow using the indirect method


Preparing cash flow statements helps businesses to know the net cash position and enables business owners to make smart decisions. Also, one can investigate the areas that require attention and accordingly optimize the cash position. Read 6 Tips for Efficient Cash Flow Management to know what all you can do to optimize the cash flow.

Cash flow statement being a key report, using accounting software helps you to get these reports instantly over and above helping you to manage your business more efficiently.

Today, accounting software is provisioned to generate the cash flow projection report that indicates a projected cash flow position considering the anticipated revenues and outflow. This helps you make a better business decision.

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