Projecting your cash flow is critical to keeping your doors open, because profits on paper don’t always ensure you can pay your bills when they’re due. Understanding how to calculate your total cash flow will help you see where all of your money is coming from and when you can expect it to arrive.
Small-Business Cash Flow
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While cash flow can include complex business transactions such as they payment of shareholder dividends, small-business cash flow usually refers to the timing of your receivables and payables. For example, when you make a sale, you can add that revenue to your balance sheet as a receivable. This might show that you have more assets than liabilities -- on paper. If the money from that sale won’t arrive for 60 days, the cash won’t “flow in” for two months. You’ll need to find other money to pay your bills due in less than 60 days. These bills might include those that arise from fulfilling that sale or cash that will “flow out” in less than 60 days.
Total Cash Flow
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In addition to revenue you generate from sales, you might have other sources of cash coming into your business. This could include interest on investments, interest earned on your operating bank account balance or interest fees you charge on late payables. It might come from the sale of assets or money you receive as refunds for returned items you purchased or services you pre-paid but didn’t receive. If you receive a judgment or settlement in a lawsuit, that can count toward your total cash flow. Your payables might include sales and income taxes, refunds or legal judgments. If you are looking to determine your cash flow from operations only, you would limit your income to sales revenues and your expenses to production and overhead costs that are directly tied to your sales activities.
Total Operating Cash Flow Formula
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To calculate total cash flow from operations, which refers to core sales activities, calculate your total expected receivables from sales for the period you are estimating. This might be for a month or quarter or for the year. Subtract your direct production and overhead costs. Enter these figures into your budget by month, quarter or year, using the exact dates you will receive your cash and the exact dates you will pay your bills. Your formula would look like: Total Sales Revenue – Total Operating Expenses = Total Operating Cash Flow. You would not add debt service expense on last year’s purchases, for example, because this was not a result of this year’s operations. If you were not operating, you would still have this expense. This will allow you to see your total operating cash flow each month, quarter and annually.
Total Business Cash Flow Formula
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If you want to see your total cash flow from your overall business, add non-sales revenues and expenses, such as interest and income taxes, to determine your total business cash flow. This would look like: Total Receivables – Total Payables = Total Cash Flow. Use only receivables and payables due in your cash flow period, not total revenue and expenses generated, which might not arrive or be due until the period for which you’re calculating cash flow.
Other Considerations
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If you depreciate assets, add that to your cash flow projections, since it will reduce your income tax expense. If you can accurately estimate bad debt, subtract it from your sales receivables numbers. If you have one or more customers with a history of late payments, adjust your receivables dates. If these late payments increase your interest payments on debt you used to fulfill those orders, factor in that added interest expense.
