Cash flow isn't just calculated based on the amount of money coming in; calculating cash flow also requires calculating expenses or cash outflows that occur during the same period.
Healthy cash flow reflects a balance between income and expenses, allowing a company to maintain its operations.
When calculating cash flow, it's important to consider three main categories of cash flow: operational, investment, and financing. Each category provides a different picture of how money moves within a company and how well the company manages its financial resources.
To better understand how to calculate cash flow in corporate finance, here's comprehensive information. Let's take a look!
What is Cash Flow?
Cash flow is the flow of money in and out of a company during a specific period. This amount of cash flow reflects how a company manages its financial resources and how efficiently it generates cash to support its operations.
A healthy cash flow is crucial for a company because it provides an overview of its financial health and ability to meet financial obligations. When cash flow shows a positive trend, it means the company has sufficient funds to maintain its operations.
Conversely, if the trend is negative, the company must be careful and meticulous in managing its finances to maintain stability.
How to Calculate Cash Flow
Calculating cash flow involves collecting data on the cash inflows and outflows of a company during a specific period. There are several ways to calculate cash flow; here are some you can follow.
1. Cash Flow from Operating Activities
Cash flow from operating activities includes cash flow from the company's primary business activities. To calculate it, use the following formula:
Operating Cash Flow = Net Income + Depreciation + Changes in Working Capital
Example:
Company A receives payment from customers of Rp500,000,000 for products sold and pays Rp300,000,000 for operating expenses, such as employee salaries and raw materials. Therefore, its operating cash flow is:
• Income: Rp500,000,000
• Expenses: Rp300,000,000
• Operating cash flow = Rp500,000,000 - Rp300,000,000 = Rp200,000,000 (positive)
2. Cash Flow from Investing Activities
Cash flow from investing activities involves the purchase and sale of long-term assets such as property, machinery, or other investments. The formula for investing cash flow is as follows:
Investment Cash Flow = Purchase of Fixed Assets - Sale of Fixed Assets
Example:
Company A purchased a new machine for Rp200,000,000 to increase production capacity and sold several old machines for Rp50,000,000. Therefore, the cash flow from investing activities is:
• Expenditure on purchasing the machine: Rp200,000,000
• Income from the sale of the old machine: Rp50,000,000
• Investment Cash Flow = Rp50,000,000 - Rp200,000,000 = Rp-150,000,000 (negative)
3. Cash Flow from Financing Activities
Cash flow from financing activities includes receipts or payments related to company financing, such as loans or stock issuance. The formula is:
Financing Cash Flow = Loan Receipts + Stock Issuance - Debt Payments - Dividend Payments
Example:
Company A borrows Rp300,000,000 from a bank for business expansion and pays Rp50,000,000 in dividends to shareholders. Therefore, the cash flow from financing activities is:
• Receipts from loans: IDR 300,000,000
• Expenditures for dividends: IDR 50,000,000
• Funding cash flow = IDR 300,000,000 - IDR 50,000,000 = IDR 250,000,000 (positive)
4. Net Cash Flow
After calculating cash flow from the three categories above, the next step is to calculate the company's net cash flow. To calculate it, add the results from the three categories:
Net Cash Flow = Operational Cash Flow + Investment Cash Flow + Financing Cash Flow
Example:
Net Cash Flow = Rp200,000,000 (operational) + (-Rp150,000,000) (investment) + Rp250,000,000 (financing) = Rp300,000,000 (positive)
This means that Company A has a positive cash flow of Rp300,000,000, indicating that the company's cash flow during the period is healthy and capable of supporting operations and further development plans.
5. Cash Flow Forecasting
Cash flow forecasting is the process of predicting cash inflows and outflows over a specific period in the future. This process is crucial for companies to plan cash needs, manage liquidity, and make better financial decisions.
Cash Flow Forecasting Example:
Suppose a retail company wants to project cash flow for the next three months. Here is some data obtained from historical analysis and forward planning:
• April Cash Flow = Revenue (Rp100,000,000) - Expenses (Rp80,000,000) = Rp20,000,000
• May Cash Flow = Revenue (Rp120,000,000) - Expenses (Rp85,000,000) = Rp35,000,000
• June Cash Flow = Revenue (Rp110,000,000) - Expenses (Rp90,000,000) = Rp20,000,000
• Therefore, the net cash flow for the period from April to June is:
• April: Rp20,000,000
• May: Rp35,000,000
• June: Rp20,000,000
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