Your cash flow marks the lifeline of your business irrespective of its magnitude. The cash flow statement will thus make one of the primary documents for the assessment of its financial strength.
Even if your business reflects a profit on the income statement, the cash flow statement will tell you if you are generating solid cash to cover your operating expenses. You can thus not assume that one document can replace the other when assessing your business’ finances.
In Southlake, TX, a church accounting firm will use various techniques to assess the cash flow of your small business or nonprofit and guarantee its financial strength. The ideal method used for calculating your cash flow will primarily depend on your operational goals and the type of your venture.
Here are these calculation alternatives.
Free Cash Flow
This is the most widespread calculation method for cash flow. The metric will track how much cash remains after your capital expenditure on items such as mortgage payment and equipment. The number is reached by examining your operating cash flow and capital expenditures.
In some cases, free cash flow is called the net cash from operations. It can be used to evaluate the available funds for the expansion of your products and undertaking of activities for your business’ long-term value.
Cash Flow from Operations
The term ‘’operations’’ in this instance encompasses all your fundamental business activities. The cash flow from operations will show you how much money is coming in and being spent from your central business functions. It is the cash flow before you finance long-term capital costs.
If then your cash flow from operation is thin, you might need to consider getting financing to pay your bills. The cash flow from operations is an ideal method of cash flow calculation for businesses that own many fixed assets.
Cash Flow from Financing Activities (CFF)
This analyses your financial wellbeing by showing how you repay investors and raise capital. The activities analyzed here include the application rate for new loans, issuance of additional stock and payment of dividends.
CFF illustrates if your cash comes from outside financing instead of your operations’ revenue and helps you assess if your venture is ready for expansion. It also reveals your company’s financial muscle to would-be investors.
Discounted Cash Flow (DCF)
This looks at your free cash flow estimates vis-à-vis your capital cost. It will, therefore, determine the value of your potential investments. The estimates of your free cash flow are discounted to reach a present projection of your company’s value.
Essentially, it is an adjustment of your cash flows based on their value in the future. As such, DCF is typically used when selling a business to determine its profitability.
The methods of calculating your cash flow mentioned above will do little to your company’s bottom line if you do not have an accounting professional to interpret the numbers.
From the interpretation, you will gain insight into what you should change and what is working for you. Your cash flow metrics are thus not aspects you can afford to leave to your in-house team or any outsourced accounting firm other than the best.
