Cash flow is the money coming into an organization minus money going out. It is calculated using information from a company's balance sheet and income statement. The direct method of calculation requires knowledge of which income and expense items to include as cash flow items, and which to exclude because they don't involve the transfer of cash or cash equivalents, such as Treasury bills.
Calculate cash flows related to operating activities. Add together cash receipts from customers and cash generated from operations. Then subtract cash payments (to employees, suppliers, vendors, etc.), interest paid and income taxes paid. The result is the net cash flows from operating expenses.
Calculate cash flows related to investing activities. Total the sale proceeds from equipment and land and any cash dividends or coupon interest received from other companies. This is the net cash flow from investing activities.
Calculate cash flows related to financing activities. Subtract dividends paid and financial interest (non-operating interest) paid. Add in cash received through the issuance of stock, bonds or any paid-in capital in the form of cash. If you have used cash to pay down existing debt or repurchase stock, subtract it from your total. You now have the net cash flows due to financing activities.
Add together your three net cash flows. The result is the net cash flow for the period. Add this flow to the amount of cash and cash equivalents available at the start of the reporting period to find your current amount of cash and equivalents. Post all of this information in the statement of cash flows.
Nonprofit organizations treat donor cash receipts that carry restrictions limiting their use to long-term purposes as cash flow related to financing activities. Taxes paid may be included in whichever cash flow—operating, financial or investment—generated the tax liability.
For operating cash flows, remember to add back into your operating income non-cash expenses, such as depreciation, amortization and deferred taxes. Also add back any unrealized gains or losses, as they are on paper and don't involve an actual cash flow.
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