Calculating Cash Flow

By Tiffany Wright

As I have stated and restated in previous articles, cash flow and management of that cash flow is essential to the health and viability of your business. Most small businesses typically prepare Income Statements and Balance Sheets on an annual basis for tax purposes, sometimes on a quarterly basis for quarterly tax payments. Businesses that have bank lines of credit or term loans must usually prepare and present these same financial statements monthly so that the bank can track the company’s general performance and continued adherence to loan criteria. Most businesses do not create or track a cash flow statement. In any economic environment, cash is king. For capital intensive businesses such as real estate development or renovation, heavy construction, or over-the-road transportation, the timing of cash inflows and outflows can be critical to the success of a business during any 3-month cycle.

In this article we will focus on calculating cash flow. In the next two articles, we will cover how to prepare a cash flow statement and cash management techniques. Understanding cash flow statements and these concepts is important not only for business owners but also for those executives and managers with profit and loss responsibility at any level.

What is cash flow? Cash flow is a measure of the amount of money your company makes or brings in through various sources and spends during a given period in operations, financing, and investing. Cash flow is frequently used as a barometer of your company’s health.  It is the barometer in cash intensive businesses. Calculating cash flow accurately is vital to ensuring that your company has sufficient funds to operate.

What is cash flow? Cash flow is measured in a number of ways to provide various performance parameters of the company. There is the cash flow that the company tracks (or should track) on a daily, weekly, quarterly, and annual basis. This cash flow is tracked in the Cash Flow Statement.  Another cash flow measure is EBITDA - Earnings Before Interest, Taxes, Depreciation, and Amortization - determined from the Income Statement.

What is cash flow? The cash flow definition, according to the American Heritage Dictionary is “1) The pattern of income and expenditures, as of a company or person, and the resulting availability of cash.  2) The cash receipts or net income from one or more assets for a given period, reckoned after taxes and other disbursements, and often used as a measure of corporate worth.” The cash flow definition, according to Wall Street Words: An A to Z Guide to Investment Terms for Today’s Investor by David L. Scott is “The amount of net cash generated by an investment or a business during a specific period. One measure of cash flow is earnings before interest, taxes, depreciation, and amortization. “  It continues, “Because cash is the fuel that drives a business, many analysts consider cash flow to be a company’s most important financial statistic.”

Understanding cash flow lets you assess your financing and borrowing needs; appropriate timing of hiring and major expenditures; effect of receivables timing; payables timing; general and strategic cost-reduction efforts. 

Even a small lag in sales or payment receipt on a large product or service delivery can make a dramatic negative impact on cash flow. If you spent $50,000 delivering a service (personnel, materials, equipment rental,…) and expected payment of $65,000 at culmination of the service but payment is delayed by 60 days, the company must float the $50,000 from other cash sources and the $15,000 extra you had counted on as a buffer for another project is gone.

If you have never tracked your company’s cash flow, then start today. If you utilize Quickbooks, begin generating the Cash Flow Statement in the Reports section and populating the necessary fields with data. If you’re unsure how to proceed, use the tutorial, find a tutorial online, or ask your bookkeeper or accountant to provide you with a tutorial. Or, of course, you can have your bookkeeper or other knowledgeable employee begin inputting the data. Find the break-even points for your products or services.

Have your key employees determine the cash flow projections from their departments.  Combine these projections with yours to create the overall company projections.  Project out your cash flow needs for three (3) months, six (6) months, 1 year, and 3 years.  Some financing can take several months to obtain and other sources of financing can take up to one year so advance planning is extremely helpful. Com

pare your actual cash flow experience (i.e., quarterly Cash Flow Statement) against the projected or pro-form cash flow statement every month or quarter. Over time, you will improve the accuracy of your projections.

Tiffany Wright is the publisher of Equal Construction Record and owner of Toca Family Services, LLC, which provides interim management and project-based financial management services to small and medium businesses. She can be reached at twright@equalconstruction.com. This article is copyright protected.  All rights reserved©.