How Cash Flow Is Calculated
- Culverhouse & Co
- Jul 13
- 2 min read
Understanding how cash flow is calculated is an important part of running a successful business. While profit shows how much money your business has made, cash flow tells you how much money is actually moving in and out of your business.
Knowing the difference can help you make better financial decisions, prepare for future expenses and avoid unexpected cash shortages.
What Is Cash Flow?
One of the easiest ways to understand cash flow is to think about your own bank account.
Every time money is paid into your account, your balance increases. Every time you pay a bill, buy groceries or make another purchase, money leaves your account.
Your business works in much the same way.
Money coming into the business is known as cash inflow, while money going out is cash outflow.
If more money is coming in than going out, you have positive cash flow. This generally means your business has enough available cash to meet its day-to-day commitments.
If more money is leaving the business than coming in, you have negative cash flow.
This isn't always a cause for concern. For example, many businesses experience temporary negative cash flow when investing in new equipment, recruiting staff or expanding operations. However, if it continues for a prolonged period, it may indicate underlying financial pressures that should be addressed.
Successful businesses focus on both profitability and cash flow.
How Is Cash Flow Calculated?
The basic calculation is straight-forward:
Cash received − Cash paid out = Net cash flow
Money coming into your business may include:
Customer payments
Sales income
Loans or finance
Investment income
Money leaving your business may include:
Supplier payments
Wages and salaries
Rent and utilities
Tax payments
Loan repayments
Equipment and business investments
Regularly calculating your cash flow helps you understand your financial position and identify potential issues before they become bigger problems.
Why Cash Flow Matters
A business can be profitable but still experience cash flow problems.
For example, if customers are slow to pay their invoices, you may struggle to pay suppliers or meet payroll despite making healthy sales.
That's why successful businesses focus on both profitability and cash flow.
Looking Beyond Today's Numbers
Calculating your cash flow is only the first step.
Cash flow planning allows you to forecast how future decisions could affect your finances. Whether you're planning a major purchase, recruiting staff or preparing for growth, modelling different scenarios can help you make informed decisions with greater confidence.
Regular reviews also ensure your financial plan evolves alongside your business.
Need Help with Cash Flow Planning?
At Culverhouse & Co, we help businesses understand their cash flow, prepare accurate forecasts and make confident financial decisions.
Our Chartered advisers take the time to understand your business, your goals and your financial position before modelling different scenarios based on factors such as future spending, inflation and interest rates.
If you'd like greater clarity over your cash flow and future plans, we'd be happy to help.
Please note: This is not financial advice. For financial advice, speak to a professional.
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