Calculating cash flow is important for all business owners. However, determining which form of cash flow to calculate can be daunting. Cash flow available to the owner, before-tax cash flow and after-tax cash flow are all calculated differently. After-tax cash flow is one of the more useful cash flow measures because it considers the tax effect on profits. The present value of after-tax cash flow can be calculated to decide whether or not an investment in a business is prudent.
Calculate the company’s net income from operations. Subtract returns and allowances, costs of goods sold and general and administrative expenses from total sales. Cost of goods sold include all expenses associated with the sale of goods or services such as direct labor costs, materials and subcontractors. General and administrative expenses include overhead costs, office salaries and travel costs.
Review the calculation of net income and determine if depreciation, amortization or bad debt expense are included in the calculation. If so, add back these non-cash expenses.
Subtract the annual cost of paying down debt. For example, if the company has a credit line and pays $5,000 annually to cover monthly payments of principle and interest, subtract $5,000 from the net income from operations. This is the company’s before-tax cash flow.
Calculate taxes payable for the company. Subtract depreciation expense and interest expense from net income from operations to arrive at taxable income. Multiply the company’s taxable income by its tax rate to arrive at taxes payable for the year.
Subtract the taxes payable from the company’s before-tax cash flow to arrive at after-tax cash flow.
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