How to Calculate Cash Flow for Report Generation

By | March 28, 2022
How to Calculate Cash Flow for Report Generation

A business can run well when the control and financial records are done well too. The purpose of this is of course to prevent losses and financial collapse. One thing that business owners must know is how to calculate cash flow or cash flow.

Knowledge of how to calculate cash flow is very important because it is the core of the company’s financial statements.

The role of cash flow is vital because operational activities are very dependent on it. In small to medium scale companies, sometimes cash flow recording is still done simply.

Want to know more? Come on, read on here.

Know More About Cash Flow

Before discussing how to calculate cash flow, it’s a good idea to start this discussion about its definition and use. Also where does this cash flow come from? The definition of cash flow is the recording of cash receipts and disbursements in a certain period.

Cash flow is recorded in a company’s financial statements. This cash flow reflects how the company receives and spends money. Revenue can be obtained from sales or investments. Meanwhile, expenditures are in the form of operational needs, taxes, interest, and capital expenditures.

On the record, cash flow goes both ways. Cash in is obtained from buyers who buy products.

If you do not pay immediately when a purchase occurs, it will be recorded as cash flow originating from receivables. Meanwhile, cash out is recorded as rent, mortgage, loan payment, tax payment, debt, and other expenses.

There are three cash flow activities, namely, operating activity, investing activity, and financing activity.

Operating activity is cash flow from operational activities. While investing activity is related to cash from the sale and purchase of assets. In financing activities, cash comes from funding such as bonds, stocks, and other things that come from long-term obligations.

How to Calculate Cash Flow

Before doing calculations, business owners also need to know the method of making cash flow statements.

There are two methods, direct cash flow and indirect cash flow. Direct cash flow or also called the direct method, is a cash flow report by recording for operational activities in certain groups.

The direct method is considered easy to understand and can provide a complete picture. So, decision making can also be done easily. It takes a bank cash book and petty cash to be able to do calculations with this method.

Meanwhile, indirect cash flow is cash flow reporting that focuses on net profit and cash flow from operational activities. Through this indirect method, it displays the relationship between the income statement, cash flow, and balance sheet.

So, how do you calculate it? Here are the steps for calculating it:

1. Calculate Cash Increases and Decreases

The first thing to do when you want to calculate cash flow is to determine its decrease and increase. To be able to find out the number, it can be seen from the cash flow report and balance sheet contained in the cash account.

You can also look at the petty cash book or bank cash book. After being counted and added up, a record or report must be made.

2. Calculating and Reporting Net Cash in Operating Activities

Do not mix all net cash records in each activity but must be separated. So, the second step is to separate the money/cash used for operations. Calculate the amount and then make a net cash report on operational activities. Then, make the report.

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3. Calculating and Reporting Net Cash in Investing Activities

As with the second step, it is necessary to separate the use of net cash in investment activities.

What are the investment activities? Examples are buying and/or selling fixed assets and all long-term investments. Calculate the amount of cash used in investing activities in the current period. Make the report.

4. Calculating and Reporting Net Cash in Funding Activities

There are three activities in the cash flow statement, as previously disclosed. So, this fourth step is to separate the net cash used in financing activities.

The trick is to record income or expenses from equity and long-term liabilities. Then, a report is made.

5. Totaling Net Cash from All Activities

After getting the numbers or the amount of net cash from operational activities, investing, and funding, then calculating the cash flow can be done.

The trick is simply to add up the net cash from the three activities in question, and get the cash flow figures for a certain period. A cash flow statement can be made by not forgetting to enter the initial balance into the calculation.

Can people who are unfamiliar with cash flow calculations be able to do it?

In small companies, this calculation still has to be done. Actually, the principle of cash flow is the same as the entry and exit of money in a savings account and is very easy to understand. However, in a report, there is a grouping by type of activity.

What if there are no resources or employees capable of dealing with cash flow calculations? Or what if the owner of the company does not really understand the financial statements?

So there is a way that can be tried. That is by using accounting software which generally has a cash flow report generation feature.

This method is considered the most practical for today’s small business needs. Some software can even be obtained online and operated online as well.

The results of the report are accurate and the creation is easy and fast. If calculated, paying for the purchase of accounting software is more efficient for small companies.

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Cash Flow Statement Benefits

Business owners must understand and have a report on their cash flow.

Why is this so important?

Because cash flow reflects how much money the company actually has. Many companies, especially start-ups, have finally closed due to conceded goals. Expenses are very large even though the cash reserves are not sufficient.

In fact, cash must be maintained so that its position is always positive. Now, from the cash flow calculation, you get a reflection of how much money or cash is still available to manage the company.

Then, this report is also useful for providing an assessment of several important aspects of the company. An example is the ability to pay dividends or other obligations.

Not to forget about how the company can generate more cash in the future. All cash flows from activity items reflect whether the company’s current financial condition.

This can be used as a benchmark in predicting the amount, cash flow uncertainty, and time more accurately. This prediction will certainly not be accurate if it is based on the basic accrual value.

Then who has an interest and needs to read a cash flow statement?

Of course the company management, investors or potential investors, as well as creditors. The goal is generally to measure the company’s ability to use its cash, as well as measure the company’s need for cash.

In conclusion, how to calculate cash flow is not difficult even how to understand it. In small companies, this cash flow can be likened to money going in and out of a bank account.

If you do not have the resources or manpower in the finance department for reasons of efficiency, then the calculation can be done using online accounting software.

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Hopefully the above information can be useful for all of you.