How to calculate cash flow
Cash flow is the movement of money into and out of a company, and it can be affected by several non-cash transactions. The cash flow statement is a report of the cash received and used by the operating, investing, and financing activities of a company during an accounting period. It explains the changes during the period in cash and cash equivalents including demand deposits and short-term highly liquid investments that can be quickly converted to cash. A cash flow analysis helps to maintain operations and make investment decisions. Some of the activities in each of the three sections of the cash flow statement are shown here:
- Cash inflows include cash collections from customers, interest income received, dividends received and any other operating cash receipts.
- Cash outflows include payments to suppliers, salaries paid to employees, interest payments, payment of income taxes and any other operating cash payments.
- Investing activities
- Cash inflow includes collection on loans, cash proceeds from sale of equity such as stocks or bonds, and cash from sale of assets or physical property such as plants and equipment
- Cash outflow includes cash paid to acquire debt, purchase equity instruments, and to purchase assets or physical property such as plants and equipment.
- Financing activities
- Cash inflow includes cash proceeds from sale of stock, cash received from borrowing, cash received from contributions and investment income.
- Cash outflow includes cash paid towards principal on debt, cash paid to reacquire equity or buying back shares of stock, and dividend payments to shareholders
How to calculate cash flow for different purposes
There are many different ways how to calculate cash flow and different reasons for each. Some of the different ways how to calculate cash flow include:
- Current ratio = Current assets/Current liabilities – Shows a company’s short-term debt payment ability
- Cash flow from operations = (Net income + non-cash changes) + cash inflows from operations activities – cash outflows from operations activities
- Cash flow from investing = Cash inflow from investing activities – cash outflow from investing activities
- Cash flow from financing = Cash inflow from financing activities – cash outflow from financing activities
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