Cash flow made easy
Why is cash flow important?
If your net profit is healthy, that's great. However if your cash flow is negative you won't have any money to run your business efficiently. So if you love what you do, remember to also love your cash flow.
How to calculate cash flow
The following diagram sums up how to calculate your cash flow. Let's go through it in a little detail.
Net Profit
Net profit is your business income minus the cost of the goods sold and expenses (both operating and non-operating). It is calculated using a profit and loss statement like the one below.
Profit & Loss Statement
Income |
$100 |
|---|---|
| Less Cost of Sales | $40 |
| = Gross Profit | $60 |
| Less Expenses | $20 |
| = Operating Profit | $40 |
| Less Non-Operating Expense | $10 |
| = Net Profit | $30 |
Balance Sheet
The balance sheet shows what your business is worth and is usually drawn up at the end of an accounting period. It consists of three main elements and follows the following formula:
Assets (What you own) - Liabilities (What you owe) = Equity (Your net worth)
Cash flow
Cash flow is determined by taking into account any changes in your inventory, accounts receiveable, accounts payable (and GST) and fixed assets.