Understanding how to calculate cash flow is important to maintain the financial health of a business. Cash flow is the movement of money entering and leaving a business during a certain period, including income, expenses, investments, and loans that play a major role in financial reports and operational continuity.
In addition to understanding the concept of cash flow, you also need to know how to calculate it and create projections so you can see the overall financial condition and make the right decisions. For that reason, check out the complete explanation in this article!
What Is Cash Flow?
Cash flow is the inflow and outflow of money within a company over a certain period that reflects financial activities. Simply put, cash flow describes how money circulates within a business. Its role is very important because through cash flow reports, a company can survive and run its operations, including identifying whether it generates profit or loss.
The cash flow condition in a particular period also becomes the basis for determining the next business steps. If the result is negative, strategies are needed to improve it. On the other hand, if it is positive, the company can look for ways to further improve its performance.
How to Calculate Cash Flow
Before starting to calculate cash flow, there are several important data points that need to be prepared, such as the current period income statement and the balance sheet for the current and previous periods.
After that, you can determine the method used, either the direct or indirect method, depending on the reporting needs. Below are several ways to calculate cash flow that you should understand:
1. Operating Cash Flow
Operating Cash Flow (OCF) shows a company's ability to generate cash from its daily business activities. This calculation only focuses on operational activities, so cash flow from financing and investments is not included. The formula is as follows:
Operating Cash Flow = Net Income + Non-Cash Expenses − Changes in Working Capital
Net income reflects the profit earned, non-cash expenses include depreciation and amortization, while changes in working capital represent the difference between current assets and current liabilities.
For example, if the net income is Rp2,500,000, non-cash expenses are Rp1,000,000, and changes in working capital are Rp500,000, then the operating cash flow is:
Rp2,500,000 + Rp1,000,000 − Rp500,000 = Rp3,000,000
This value becomes an important indicator for assessing a business’s ability to generate cash from its core operations.
Also read: Examples of Financial Bookkeeping for MSMEs & How to Create Them
2. Free Cash Flow
Free Cash Flow (FCF) is the remaining cash after a company fulfills all of its obligations. These funds can be used for expansion, business development, or distributed to shareholders.
By calculating it, you can see how flexible the company’s financial condition is.
The formula is as follows:
Free Cash Flow = Net Income + Non-Cash Expenses − Changes in Working Capital − Capital Expenditures
Net income represents company profit, non-cash expenses include depreciation and amortization, changes in working capital are the difference between current assets and liabilities, while capital expenditure is the cost used to acquire or maintain fixed assets.
For example, if the net income is Rp2,000,000, non-cash expenses are Rp1,000,000, changes in working capital are Rp1,250,000, and capital expenditures are Rp500,000, then:
Rp2,000,000 + Rp1,000,000 − Rp1,250,000 − Rp500,000 = Rp1,250,000
This result shows a free cash flow of Rp1,250,000, which reflects the company’s financial strength and its ability to take advantage of growth opportunities.
3. Cash Flow from Investing Activities
Cash Flow from Investing (CFI) shows the net flow of cash originating from capital expenditures, mergers and acquisitions, as well as the purchase or sale of securities.
From this, you can see how a company allocates funds for investment and long-term growth. The formula is as follows:
CFI = Cash Inflows from Investing Activities − Cash Outflows from Investing Activities
This data can be seen in the cash flow statement or by comparing non-current assets in the balance sheet over two periods.
Example one: a company purchases property and equipment worth Rp5,000,000, acquires another business for Rp7,000,000, and sells securities worth Rp2,000,000. The calculation is:
Rp2,000,000 − (Rp5,000,000 + Rp7,000,000) = −Rp10,000,000
Example two: the company receives Rp5,000,000 from equipment sales and Rp5,000,000 from acquisitions, then spends Rp2,000,000 on securities investment. Therefore:
(Rp5,000,000 + Rp5,000,000) − Rp2,000,000 = Rp8,000,000
This result helps evaluate how the company manages cash for long-term investment needs.
Also read: 10+ Common Mistakes MSMEs Must Avoid
4. Cash Flow from Financing Activities
Cash Flow from Financing (CFF) shows the net cash flow between a company and its owners, creditors, and investors. From this, you can see how a company obtains capital and distributes its funds. The formula is as follows:
Cash Flow from Financing Activities = Cash Inflows from Issuing Equity or Debt − (Dividend Payments + Repurchase of Debt and Equity)
Cash inflows come from issuing shares or taking on additional debt, while dividend payments and repurchases of debt or shares are considered cash outflows.
For example, a company receives Rp15,000,000 from issuing equity or debt, pays Rp2,000,000 in dividends, and repurchases Rp5,000,000 worth of debt and equity. The calculation is:
Rp15,000,000 − (Rp2,000,000 + Rp5,000,000) = Rp8,000,000
This value provides insight into how the company raises and distributes its funds.
5. Net Cash Flow
To fully understand how to calculate cash flow, you also need to know net cash flow. Net cash flow is the difference between total cash inflows and total cash outflows within a period and becomes an important indicator of a company’s financial condition.
The formula is:
Net Cash Flow = Total Cash Inflows − Total Cash Outflows
For example, if a company has total cash inflows of Rp15,000,000 and total cash outflows of Rp10,000,000, then:
Rp15,000,000 − Rp10,000,000 = Rp5,000,000
This calculation helps determine whether the business is generating cash or using more cash so that cash flow balance can be maintained.
Creating a Cash Flow Projection
After understanding how to calculate cash flow, the next step is to create a projection. A cash flow projection helps estimate future cash inflows and outflows based on previous data and the business plans that will be implemented.
With cash flow projections, you can anticipate funding shortages, make more accurate decisions, and demonstrate the financial condition of your business to investors or lenders.
1. Steps to Create a Cash Flow Projection
To avoid making projections based on guesswork, there are several stages that need to be understood first. By following the right steps, the calculations can become more accurate and relevant to business conditions.
Collect historical data: Prepare previous financial statements and cash flow data as the basis for preparing projections.
Determine key assumptions: Create estimates that affect projections, such as sales growth, expense trends, and expected cash inflows.
Prepare monthly projections: Calculate monthly cash flow for the next year or according to business needs.
Monitor and adjust: Compare actual results with projections regularly, then make adjustments if financial conditions change.
2. Example of a Cash Flow Projection
As an illustration, a small manufacturing business in Indonesia prepares a cash flow projection for the following year by collecting historical sales, expense, and cash flow data.
From this data, they estimate monthly cash inflows, calculate expense requirements, and include loan payments and interest. The projection results help them identify potential funding shortages during high production periods so they can plan short-term working capital loans.
By updating projections regularly, businesses can manage finances more proactively, reduce the risk of cash shortages, and make decisions that support growth and stability.
That is the complete discussion on how to calculate cash flow and create projections. By understanding how to calculate cash flow and prepare projections properly, you can keep your business stable and be better prepared for various financial needs in the future.
Careful planning helps maintain healthy cash flow and allows business decisions to be made more strategically. If your business requires additional funding support for expansion, you may consider financing solutions from BFI Finance.
BFI Finance provides financing services with collateral such as motorcycle BPKB, car BPKB, and house/shophouse certificates with a practical and transparent process. With official licensing and supervision from the Financial Services Authority (OJK), loan applications at BFI Finance are guaranteed to be legally compliant. Therefore, you can confidently realize your financial plans because #SelaluAdaJalan with BFI Finance.
