How to calculate and improve your cash flow?

In the large family of financial indicators, cash flow is of particular importance.

Cash flow reflects a company's financial health and development potential, insofar as it represents the surplus cash generated by its activity.

Shareholders, investors, partners and employees all 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 challenges

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, as well as its potential for investment or repayment, to develop its business or replenish its working capital.

In short, it's 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've just discussed, knowing your cash flow makes sense on several levels.

In particular, it enables the company 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 income statement and net income

From your income statement :

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

Example of calculating cash flow from net income

Using the table from our article on intermediate operating totals, which we remind you are fictitious and given as an example:

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

Calculation of cash flow from operations based on gross operating profit (EBITDA)

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

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: €1,500 (extraordinary income) ;
• cash expenses: :
  • €40,000 (income tax),
  • 2,000 (financial expenses),
  • 2,000 (operating expenses),
  • 500 (exceptional expenses),
  • for a total of €44,500;
• CFS = 289,000 + 1,500 - 44,500 = €246,000.

How to interpret and improve cash flow?

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

If cash flow is positive: your company generates sufficient profits to cover its operating cycle.

It can therefore :

• boost cash flow via working capital ;
• invest in new projects;
• pay dividends to associates;
• repay 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 must rapidly improve its cash flow by :

• identifying problem areas, in particular by calculating intermediate operating 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 sales if subject to corporate income tax ;
• 15% of sales if subject to corporate income tax.

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What about net cash flow?

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