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- Calculating operating cash flow: complete guide
Calculating operating cash flow: complete guide
As an entrepreneur, you know that cash flow is the lifeblood of your business. Positive cash flow can pave the way to success, while negative cash flow can quickly plunge you into a financial crisis. Let's talk about the importance of operational cash flow and how you can calculate and improve it.
What is cash flow and how do you calculate it?
Cash flow is the net change in cash of a company during a given period. It includes all income and expenses, both incoming and outgoing cash flows. You can calculate cash flow by subtracting total income from total expenses. However, how you calculate this cash flow depends on the type of cash flow you are interested in, such as operating, free, or other forms of cash flow.
How do you calculate operating cash flow?
To calculate operating cash flow, you can use several methods. A common formula is:
Operating cash flow = profit +- working capital + depreciation & amortisation
So this calculation takes into account both net income, depreciation and changes in working capital. Here, net income represents all income minus expenses. Depreciation is a cost that is included in profit but has no direct impact on the amount of cash. Working capital refers to current assets and liabilities; an increase in working capital is deducted because it means less cash available.
How can you improve operating cash flow?
1. Quick billing:
Make sure invoices are sent soon after delivering a product or service.
2. Efficient inventory management:
Minimise excess inventory to optimise your working capital.
3. Adjusting payment terms:
Negotiate longer payment terms with suppliers and offer customers discounts for prompt payments.
4. Good turnover management:
Increasing sales can also lead to a positive impact on operating cash flow.
5. Projections:
By making good forecasts, you can better estimate future cash flows and adjust your investments and spending accordingly.
Your company's liquidity and equity are strongly influenced by your operating cash flow. A strong operating cash flow provides more room for investment and reduces the need to raise debt, ultimately leading to a healthier financial future for your business.
What is the significance of this calculation?
Calculating and understanding your operating cash flow is crucial to the success and growth of your business. Conscious attention to factors affecting your cash flow, combined with proactive steps, can lead to financial stability and growth.
Want to regain control of your cash flow? Contact me and download the "Cashflow improver" guide
Kurt Vervloet
Kurt Vervloet is a business coach, blogger and speaker. Since 2017, he has been coaching businesses around the world, ranging from solo entrepreneurs, SME companies to executive management teams at large organisations. His clients choose to work with him because of my proven, no-nonsense approach to optimising and scaling businesses. By achieving great results with his clients, he has already been rewarded with several Awards.
