How to calculate cash flow: a step-by-step guide

In this short guide, we share everything small to medium-sized businesses need to know about how to calculate cash flow, including creating a cash flow statement and working out net cash flow. Read on to learn cash flow management tips and strategies.

What is cash flow?

Cash flow is the technical term for the money that moves in and out of your business. Your level of income and expenditure impacts your cash flow position – which can either be positive or negative.

If more money is coming into your business than going out, you have positive cash flow. If more money is going out of your business than coming in, you have negative cash flow.

Small businesses need to keep a beady eye on their cash flow. With less capital than larger enterprises, a single transaction can have a significant impact on cash flow. If you know exactly what’s coming in and going out of your business, it’s easier to make smart financial decisions.

Read our guide to understand more about the difference between cash flow and profit.

Cash flow statements: how to calculate cash flow

A cash flow statement is a type of financial report that shows you where money is spent and generated.

It shows you the opening and closing balance for a specific period, so you can see how much money has moved through your business during that time.

These statements are divided into multiple sections: cash flow from operations, cash flow from investments, and cash flow from financing.

1. Cash flow from operations shows you what’s been earned and spent in your usual business activities. From sales and payroll to inventory costs.
2. Cash flow from investments shows you larger items that have been bought and sold during this period. Things like business vehicles and properties.
3. Cash flow from financing shows you cash from loans and repayments. Any money received from or repaid to lenders appears here.

Healthy businesses will usually see most of their cash flow activity happening in the cash flow from operations section. This is money earned from sales and spent on day-to-day expenses.

If you have a cloud-based accounting platform, this will generate a cash flow statement for you. Here’s an example of how to calculate cash flow if you’re doing it yourself:

1. Find your starting balance (this will be on your income statement for the relevant period).
2. Calculate cash flow from operations by adding up your income and subtracting operational expenses.
3. Do the same for cash flow from investments and cash flow from financing, so you have three separate figures. These could be positive or negative, depending on how much money has moved in and out of your business.
4. Total up the three numbers to see how much cash has moved through your business (net cash movement).
5. Combine your net cash movement with your opening balance to calculate the closing balance.

Check out this simple, practical example of a cash flow statement to see one in action.

Using a cash flow statement

There are some key features of a cash flow statement that are especially useful for small businesses.

At the bottom of your cash flow statement, you’ll find a summary containing your opening balance, net cash movement, and closing balance.

Your net cash movement shows how much money has moved through your business during a set period (from operations, investments, and financing).

Your closing balance tells you how much cash you have available in your business at the end of this period. If the number has a minus, you have negative cash flow.

This isn’t automatically a reason to worry – your cash flow position changes every time money is spent or paid into your business. Persistent negative cash flow can be a cause for concern, though. Check-in with your accountant or bookkeeper if you’re worried about the numbers.

What is net cash flow?

The cash flow statement example we’ve already shared shows you net cash flow.

Here’s a simple net cash flow formula you can follow:

Total business income (operations + investments + financing income) - total business expenditure (from operations, investments, and financing) = net cash flow

Calculating net cash flow tells you how much money is left in your business for a certain period. This information can help you determine whether your business is financially sustainable, what investments you can make, and where greater income or lesser expenditure is necessary.

Calculating net cash flow: An example

You can calculate your net cash flow by subtracting your total cash outflows from your total cash inflows. Like this:

Total income for January 2023 = £30,000 Total expenditure for January 2023 = £15,000

£30,000 - £15,000 = £15,000

Net cash flow = £15,000

If you’d prefer not to do the maths yourself, our cash flow calculator will do the heavy lifting for you. Online accounting software like Xero gives you all the tools to calculate and manage your cash flow – without the complicated sums.

Understanding where your net cash flow comes from can help you get a view of the financial health of your business. If you’re generating most of your income from selling your equipment or assets, then your positive cash flow isn’t necessarily a good sign.

If you recently invested in bigger premises to support your growing team, then negative cash flow isn’t necessarily a bad sign. That’s why cash flow statements are useful – they help you understand where money is being spent and generated.

Operating cash flow versus free cash flow – what’s the difference?

Not all cash flow is free for you to spend.

Operating cash flow is the amount generated by your normal business activities. You can calculate it by subtracting your operating expenses from your total revenue for a set period. Operating cash flow tells you if there’s enough money in your business to keep running.

Free cash flow (or FCF) is the amount of money available in your business, once capital expenditure is subtracted. Lenders and investors often look at your FCF to determine whether your business is financially sustainable.

If you can only afford your bills and there’s little room for profit, lenders and investors will be less inclined to finance your business. Check out our guide on how to create a calculation of cash flow from operations.

The importance of effective cash flow management

A clear view of your cash flow helps you spot the financial strengths and weaknesses of your business. Through cash flow statements, projections, and reports, you can see the impact of expenditure and the activities that generate the most income.

Effective cash flow management strategies open the doors to external investment. If you can demonstrate that your business model is financially sustainable, lenders and investors will feel confident about financing your business. Where finances aren’t so good, you can use reports and projections to spot potential gaps in your income before they become an issue.

Proper cash flow management means you’re never in the dark about how much you have to spend.

You can also highlight possible cash flow problems before they become an issue.

Practical tips for cash flow management

Keeping on top of your cash flow doesn’t have to be complicated. With the help of some effective cash flow management strategies, you can get a clear picture of your finances.

Try these five practical cash flow management tips:

1. Create and review your budgets frequently to make sure you’re operating within your means
2. Calculate your free cash flow to see if you’re making a regular profit (or just covering costs)
3. Create and review cash flow forecasts frequently so you know what’s coming up ahead
4. Generate cash flow statements often to see the different levels of income and expenditure across your business
5. Digitise your invoicing process and automate follow-ups to prevent late payments that disrupt cash flow

There are warning signs that indicate whether you’ll run into cash flow trouble. We’ve shared them in our cash flow challenges report.

For more ways to make sense of the numbers, check out our cash flow management tips.

Enhance your cash flow with Xero

Businesses get cash flow clarity when they use Xero. Generate cash flow statements, forecasts, and reports at the touch of a button with Xero’s cash flow management software. See your financial position at a glance, with a live dashboard that gathers financial data from across your accounts.

For more on managing your business finances, visit our cash flow support content hub.