How can you calculate and improve your cash flow?

Cash flow is one of the most important financial indicators.

Cash flow is a measure of a company 's financial health and potential for growth, in that it represents the surplus cash generated by its business.

Shareholders, investors, partners and employees see it as a real sign of sound financial management.

To find out how to calculate cash flow, go to ⤵️

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What is cash flow?

Cash flow: definition and issues

Cash flow is a ratio that evaluates :

• the resources generated by the company's operating cycle at the end of an accounting period,
• its profitability and its potential in terms of investments or repayments, to develop its business or replenish its working capital.

In short, it is an indicator of whether the company needs external resources to operate and whether its business model is viable.

Why calculate cash flow?

In addition to the issues we have just discussed, knowing your cash flow makes sense on several levels for a company.

In particular, it enables them to calculate other financial indicators:

• rate of return: cash flow/sales ;
• debt repayment capacity = debt/cash flow.

How do you calculate it? 2 methods

Calculating cash flow from the income statement and net profit

From your income statement :

• take the net profit and add non-cash expenses including :
  • depreciation and amortisation
  • provisions for liabilities and charges;
• then subtract non-cash income:
  • operating, financial and exceptional write-backs,
  • income from the sale of assets,
  • the share of investment grants for the financial year in question.

Example of calculating cash flow from net profit

Using the table from our article on intermediate operating totals, the figures are fictitious and given as an example:

• net profit in this case is €243,000;
• non-cashable income is zero;
• non-cash expenses amount to €3,000 (depreciation);
• CASH FLOW = €243,000 + €3,000 = €246,000

Calculating cash flow from operations from gross operating surplus (EBITDA)

Cash flow can also be calculated from EBITDA, which is the result of this calculation:
EBITDA = Production for the year + Sales margin + Operating subsidies - Taxes - Payroll costs

The cash flow is then calculated as follows:

Example of calculating cash flow from EBITDA

Using the same example and the same table :

• in this case, EBITDA is €289,000;
• cashable income of €1,500 (exceptional income);
• cash expenses of :
  • 40,000 (income tax),
  • 2,000 (financial expenses),
  • 2,000 (operating expenses),
  • 500 (exceptional expenses),
  • giving a total of €44,500;
• CFS = 289,000 + 1,500 - 44,500 = €246,000.

How should cash flow be interpreted and improved?

As you can see, cash flow shows whether or not you are financially independent.

Positive cash flow means that your company is generating sufficient profits to cover its operating cycle.

It can therefore :

• top up its cash flow via its working capital ;
• invest in new projects
• pay dividends to shareholders;
• repay its debts and borrowed capital;
• apply for new financing by presenting its good results.

Negative cash flow: if your company is young, it is not yet generating sufficient profits to cover its cycle.

It needs to improve its cash flow quickly by :

• identifying the problem areas, in particular by calculating intermediate management balances;
• applying for external financing (banks, etc.) or internal financing (capital contributions from new shareholders), for example.

According to expert-comptable.com, cash flow should represent :

• 5% of the company's turnover if it is subject to corporation tax ;
• 15% of turnover if subject to income tax.

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What about net cash flow?

To take this a step further, you can calculate net cash flow, which represents cash flow after repayment of the capital borrowed: