How to Calculate Cash Flow: A Complete Guide for Small Business Owners
Cash flow is the lifeblood of any business. While profits may look great on paper, if you don't have enough cash coming in to cover expenses, your business can quickly find itself in trouble.
In this guide, we’ll break down what cash flow is, how to calculate it, and why it matters. We'll also give you clear examples and answer the most common questions small business owners ask.
What Is Cash Flow?
Cash flow is the movement of money in and out of your business. It includes all cash that comes into your business (inflows) and all cash that leaves your business (outflows).
Positive cash flow means you’re bringing in more than you’re spending. Negative cash flow means you’re spending more than you’re earning—which can lead to cash shortages, even if your business is profitable on paper.
Why Cash Flow Is Important
It ensures you can pay bills, employees, and suppliers on time.
It helps you plan for growth, invest in inventory, or hire staff.
It keeps your business healthy and prevents cash crises.
It can be the difference between surviving and thriving.
How to Calculate Cash Flow
There are a few ways to calculate cash flow, depending on how detailed you want to get. Let’s start with the basic version.
1. Basic Cash Flow Formula
Cash Flow = Cash Inflows – Cash Outflows
Cash inflows include customer payments, loans received, investment income, etc.
Cash outflows include rent, salaries, inventory, utilities, marketing, loan repayments, etc.
2. Operating Cash Flow (OCF)
Operating Cash Flow focuses on the core business operations, not investments or financing.
OCF Formula (Indirect Method)
OCF = Net Income + Non-Cash Expenses + Changes in Working Capital
3. Free Cash Flow (FCF)
This tells you how much cash is left after capital expenses, like equipment or property.
FCF = Operating Cash Flow – Capital Expenditures
Free Cash Flow is important if you're planning for expansion, taking on investors, or evaluating long-term sustainability.
Examples of Cash Flow Calculations
Example 1: Basic Cash Flow
A boutique in Los Angeles has:
$15,000 in customer payments
$2,000 in supplier payments
$3,000 in rent
$1,500 in payroll
$500 in utilities
Cash Flow = $15,000 - ($2,000 + $3,000 + $1,500 + $500) = $8,000
Positive cash flow — great!
Example 2: Operating Cash Flow
Let’s say a small ecommerce store has:
Net Income: $20,000
Depreciation (non-cash expense): $3,000
Increase in Accounts Receivable: -$5,000
Decrease in Inventory: +$2,000
Increase in Accounts Payable: +$1,000
OCF = $20,000 + $3,000 - $5,000 + $2,000 + $1,000 = $21,000
Healthy operating cash flow — operations are generating solid income.
Example 3: Free Cash Flow
From the example above, if capital expenditures (equipment purchases) were $7,000:
FCF = $21,000 - $7,000 = $14,000
Still solid! This is what’s left for growth, dividends, or cash reserve.
How to Monitor Cash Flow
To stay on top of your cash flow:
Use bookkeeping software like QuickBooks, Xero, or Wave
Run a monthly cash flow statement
Forecast future inflows and outflows
Keep a buffer — aim for 3–6 months of expenses in reserves
Hire a bookkeeper (like us!) to help maintain accurate records
Tips to Improve Cash Flow
Invoice Quickly – Don’t wait to bill clients.
Shorten Payment Terms – Net 15 instead of Net 30, if possible.
Follow Up on Late Payments – Use automated reminders or a virtual assistant.
Negotiate with Vendors – Get extended terms or early payment discounts.
Cut Unnecessary Expenses – Review subscriptions, overhead, and marketing ROI.
Lease Instead of Buy – Maintain flexibility and conserve cash.
Use a Line of Credit Strategically – Only when necessary, and as a buffer.
7 FAQs Small Business Owners Ask About Cash Flow
1. What’s the difference between profit and cash flow?
Profit is revenue minus expenses. Cash flow tracks the actual movement of money. You can be profitable but still have negative cash flow.
2. How often should I review my cash flow?
At least monthly. Weekly if you're in a fast-moving business or experiencing cash challenges.
3. Is negative cash flow always bad?
Not necessarily. If you're investing in growth or launching a product, you might experience temporary negative cash flow.
4. Can I calculate cash flow manually?
Yes, using spreadsheets or paper. But software makes it easier, especially when your business grows.
5. What’s a good cash flow margin?
Aim for at least 10–20%. That means 10–20 cents of every dollar is cash flow available to reinvest or save.
6. Should I include credit card sales in cash flow?
Yes, include them when the funds are deposited into your account—not at the point of sale.
7. How can a bookkeeper help with cash flow?
Bookkeepers track every inflow/outflow, generate reports, forecast future needs, and help you avoid surprises.
Final Thoughts
Calculating and managing cash flow isn't just a finance task—it’s a critical survival skill for every small business owner. Whether you’re running a legal firm in LA, an online store, or a local construction business, cash flow keeps you operational, confident, and ready to grow.
If cash flow stresses you out or your numbers are all over the place, we’re here to help. At Bookkeeping for Success, we work with small businesses across industries to streamline bookkeeping, track cash flow, and keep finances crystal clear.