How to Calculate Cash Flow: A Practical Guide for Business Owners Who Want Predictable Cash

A Bennett Financials Playbook With Fractional CFO Discipline

If you’ve ever looked at a profitable Profit & Loss statement and thought, “Then why is my bank balance lower?”—you’re already asking the right question. This guide will show you how to calculate cash flow for your business. This guide is designed for business owners who want to gain control over their cash flow and make more predictable financial decisions. Cash flow is the difference between a business that feels stable and one that feels constantly reactive, even when sales are strong.

At Bennett Financials, we see cash flow confusion most often in growing businesses. The company is doing more: more customers, more payroll, more tools, more inventory, more tax obligations—yet cash doesn’t move in a straight line. That’s because cash flow isn’t just about profit. It’s about timing.

This blog explains how to calculate cash flow in a way that’s useful for real decisions. We’ll cover the common methods, the key categories (operating, investing, financing), the working capital drivers that usually cause surprises, and the CFO-level approach we use to turn cash flow into something you can forecast—not fear.

What cash flow actually means (in plain language)

Cash flow refers to the movement of money into and out of a company over a certain period of time. It is different from revenue, which is the income earned from sales of products and services, and different from profit, which is the amount of money left after subtracting expenses from revenues.

Cash flow is simply: cash in minus cash out over a period of time.

Calculating a business’s cash flow involves tracking money moving in (inflows) and out (outflows), categorized into Operating, Investing, and Financing activities.

Cash flow can be broken down into three activities: Operating, Investing, and Financing. It’s important to note that cash flow is different from revenue, which is the income earned from sales of products and services, and different from profit, which is the amount of money left after subtracting expenses from revenues.

But in business, it’s helpful to break cash flow into three categories, which helps you see how money flows through these activities.

Operating cash flow (OCF)

Cash generated or used by your core operations—selling, delivering, collecting, and paying for what you run day-to-day—from normal business operations.

Operating cash flow gives a picture of the company’s ability to generate cash from its normal operations, which is a key consideration when prioritizing budget spending.

Investing cash flow

Investing activities involve cash used for or received from long-term assets such as equipment, vehicles, software implementation, property, and major upgrades. Cash flow from investing, also known as investing activities cash flow, tracks these cash inflows and outflows. Investing Activities Cash Flow (CFI) refers specifically to cash spent on buying or selling long-term assets.

Financing cash flow

Cash from or to funding sources—such as loan proceeds, loan payments, owner contributions, owner distributions, and investor funding—are part of financing activities. This is known as cash flow from financing, financing activities cash flow, or flow from financing activities. Financing Activities Cash Flow (CFF) includes cash from debt and equity financing as well as outflows for dividends and debt repayment.

Most business “cash problems” are operating cash flow problems—especially working capital timing.

Fractional CFO lens (Bennett Financials): We treat cash flow as a system. If you can explain what moves cash, you can manage it.

The three ways to calculate cash flow

There are three common approaches depending on what you need. A key concept in calculating cash flow is the net cash flow formula, which helps you analyze the balance between cash inflows and outflows. Additionally, cash flow can be broken down into three activities: Operating, Investing, and Financing.

1. The simple cash flow calculation (fast, bank-balance focused)
2. Cash flow from financial statements (accounting-based, accurate, best for monthly reporting)
3. A forward-looking cash flow forecast (planning-based, best for preventing surprises)

A growth-ready business eventually uses all three.

Method 1: The simple cash flow calculation (quickest)

This is the fastest way to calculate cash flow:

Net Cash Flow = Ending Cash Balance − Beginning Cash Balance

Example: Strategic Finance & CFO Services

• Beginning cash on January 1: $120,000
• Ending cash on January 31: $95,000
• Net cash flow for January: −$25,000

Net cash flow is the difference between all the company’s cash inflows and cash outflows in a given period. To calculate net cash flow, simply subtract the total cash outflow from the total cash inflow.

Net Cash Flow = (Total Cash Inflow) − (Total Cash Outflows)

For example, if your total cash inflow for the month is $50,000 and your total cash outflows are $40,000, your net cash flow would be $10,000.

This tells you what happened, but not why. To make it useful, you add categories:

Net Cash Flow = (Cash Inflows) − (Cash Outflows)

Common inflows:

• Customer payments received
• Loan proceeds
• Owner/investor contributions
• Refunds or rebates

Common outflows:

• Payroll (net pay)
• Payroll taxes and benefits drafts
• Vendor payments
• Rent and utilities
• Marketing spend
• Loan payments
• Equipment purchases
• Owner distributions

For project cash flow analysis, it’s essential to estimate both cash inflows and outflows.

This method is great for a quick read, especially weekly. It becomes even better when you separate inflows/outflows into operating vs investing vs financing.

Bennett Financials tip: Even a simple weekly cash tracker becomes powerful when it includes “hidden” debits like payroll taxes, benefit pulls, and annual insurance payments.

Method 2: Calculate cash flow using financial statements (the “true” accounting method)

This is how cash flow is calculated on a formal Statement of Cash Flows. The most common approach is the indirect method, which uses data from the income statement and balance sheet to reconcile your profit to your cash movement, adjusting for non-cash items and working capital changes. Non-cash expenses, such as depreciation and amortization, reduce profit without actual cash outflow. The statement also accounts for changes in cash equivalents to reflect net changes in liquidity. Accurate inputs and classifying transactions correctly are essential for strong financial reporting and accurate cash flow statements.

Step A: Start with net income

Net income comes from your P&L. It’s your accounting profit.

Step B: Add back non-cash expenses

Some expenses reduce profit but do not immediately reduce cash, such as:

• depreciation and amortization
• some non-cash adjustments (varies)

So you add those back.

Step C: Adjust for changes in working capital

This is where cash flow lives or dies.

Working capital accounts include:

• Accounts Receivable (AR)
• Inventory
• Accounts Payable (AP)
• Accrued expenses and other short-term liabilities
• Deferred revenue (if applicable)

Net working capital, defined as current assets minus current liabilities, plays a crucial role in cash flow calculations. Changes in net working capital are often deducted in free cash flow formulas to evaluate a company’s liquidity and operational efficiency. Overlooking working capital changes can significantly affect cash flow calculations.

Key rule of thumb:

• If AR increases, cash decreases (you sold, but haven’t collected yet)
• If inventory increases, cash decreases (you bought stock, cash went out)
• If AP increases, cash increases (you haven’t paid vendors yet)
• If deferred revenue increases, cash increases (you collected before delivering)

Operating Cash Flow formula (simplified)

**Operating Cash Flow = Net Income

• Non-cash expenses
  ± Changes in working capital**

Then you add:

• Investing cash flow (capex purchases/sales of assets)
• Financing cash flow (loans, distributions, contributions)

And you reconcile to the change in cash.

Fractional CFO lens: Profit is a scoreboard. Cash flow is the game film. Working capital is the plot twist.

Method 3: The cash flow forecast (how you prevent surprises)

A statement of cash flows is backward-looking. A forecast is forward-looking.

At Bennett Financials, when a business asks “How do we calculate cash flow?” what they usually need is not just historical calculation—they need a way to see cash before it happens.

Cash flow forecasts should be prepared for a specific period, such as a month, quarter, or year, to ensure accurate financial planning. Engaging a fractional CFO can provide expert support in this process, and understanding their hourly rates is important for budgeting. Identifying the timing of cash movements within that specific period is crucial in cash flow projections, as it helps anticipate potential shortfalls or surpluses.

The most practical format for operating businesses is the rolling 13-week cash flow forecast.

What a 13-week forecast includes

• Starting cash balance (week 1)
• Expected cash inflows each week (collections, deposits, other income)
• Expected cash outflows each week (payroll, taxes, rent, vendors, debt, marketing)
• Ending cash balance each week
• Notes/assumptions so you know what’s real vs estimated

Why weekly?
Because payroll and taxes don’t care about your monthly close. Weekly forecasting catches timing risk before it becomes a crisis.

Fractional CFO tie-in: A CFO-level cash forecast includes “non-obvious” items like payroll tax withdrawals, benefit drafts, annual software renewals, quarterly tax estimates, and seasonal spikes.

Free cash flow and its importance

Free cash flow (FCF) is one of the most telling indicators of a business’s financial health. It measures how much cash your company generates from its core business operations after accounting for capital expenditures—those necessary investments in equipment, property, or technology that keep your business running and growing. In other words, free cash flow is the cash left over after your business has covered its operating cash flow needs and invested in its future.

The free cash flow formula is straightforward: Free Cash Flow (FCF) = Operating Cash Flow – Capital Expenditures

For small business owners, tracking free cash flow is essential. Positive free cash flow means your business has enough cash to reinvest in growth opportunities, pay down debt, or distribute dividends to owners and investors. It’s a sign that your business is generating more cash than it needs to maintain its operations and assets. On the other hand, negative free cash flow can be a warning sign of cash flow problems, indicating that your business may be spending more on capital expenditures or struggling to generate sufficient cash from its core operations.

By regularly calculating free cash flow, you gain a clearer picture of how much cash your business truly has available for strategic decisions. This insight helps you avoid surprises, plan for expansion, and ensure your company remains financially resilient.

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The most common cash flow drivers (and why they surprise owners)

1) Accounts Receivable (AR) timing

You can “sell” a lot and still be cash-poor if customers pay slowly. AR grows, cash shrinks.

Improvement moves:

• invoice faster
• tighten payment terms
• require deposits or milestone billing
• implement consistent collections follow-up
• reduce disputes with clearer scope and documentation

2) Payroll and payroll taxes

Payroll creates multiple cash events:

• net pay to employees
• payroll tax remittances
• benefit premium drafts
• retirement funding

Many businesses budget for paychecks but forget the timing of tax pulls and benefits.

3) Inventory and purchasing cycles (if applicable)

Buying inventory consumes cash now to create revenue later. The faster you grow, the more cash gets tied up unless turns improve.

4) Debt payments and financing timing

Loan payments are fixed. As other costs rise, debt can become a tighter constraint—especially if cash planning isn’t disciplined. Debt repayments are a key component of cash flow from financing activities and must be tracked to accurately assess your cash position and financial obligations.

5) One-time expenses

Annual insurance, software renewals, legal fees, equipment purchases, taxes—these are predictable, but often not planned.

Common mistakes in cash flow calculation

Even experienced business owners can make mistakes when calculating cash flow, which can lead to misleading financial statements and unexpected cash flow problems.

Overlooking Non-Cash Items

One frequent error is overlooking non-cash items like depreciation and amortization—these don’t affect your cash balance directly but must be adjusted for in your cash flow statement to reflect true cash movements.

Misclassifying Cash Flows

Another common pitfall is misclassifying cash flows. For example, recording a loan repayment as an operating expense instead of a financing activity can distort your understanding of where cash is actually going.

Timing Issues

Timing issues also trip up many businesses; failing to account for when cash actually enters or leaves your accounts (as opposed to when revenue or expenses are recorded) can create a false sense of security.

Additionally, changes in working capital—such as increases in accounts receivable or accounts payable—are often ignored or misunderstood. If you don’t track how much cash is tied up in unpaid invoices or how much you owe to vendors, your cash flow calculations may be way off.

To avoid these mistakes, always review your cash flow statement carefully, ensure all non-cash items are properly adjusted, and pay close attention to working capital movements.

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Tips for accurate cash flow calculation

Getting your cash flow numbers right is crucial for understanding your business’s financial health. Here are some practical tips to help small business owners ensure their cash flow calculations are accurate:

Classify Transactions Correctly

1. Classify transactions correctly: Make sure every cash movement is categorized as operating, investing, or financing activity in your cash flow statement. This helps you see where your cash is coming from and where it’s going.

Include Non-Cash Transactions

1. Include non-cash transactions: Adjust for non-cash items like depreciation and amortization, so your cash flow reflects actual cash movements, not just accounting entries.

Check Transaction Dates

1. Check transaction dates: Only include cash inflows and outflows that occurred within the specific reporting period to avoid double-counting or missing transactions.

Reconcile Regularly

1. Reconcile regularly: Review your cash flow statement against your bank statements and accounting records to catch any discrepancies or errors early.

Seek Professional Advice

1. Seek professional advice: If you’re unsure, consult a financial advisor or accountant. Their expertise can help you avoid costly mistakes and ensure your cash flow reporting is reliable.

By following these steps, you’ll have a clearer, more accurate view of your business’s cash position—empowering you to make better decisions and avoid cash flow surprises.

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A practical step-by-step: calculate cash flow for your business this month

Here’s a simple workflow you can use without overcomplicating it:

1. Step 1: Pull beginning and ending cash balances
2. Use your bank accounts (and only cash-like accounts, including cash equivalents). Compute the net change.
3. Step 2: List major cash inflows

5. customer payments received (include all cash inflow from sales and services to calculate your total cash inflow)

6. other income (add any additional cash inflow from sources like interest or asset sales to your total cash inflow)

7. financing proceeds (include cash inflow from loans or investments as part of your total cash inflow)

8. refunds (add any cash inflow from returned goods or overpayments to your total cash inflow)

9. customer payments received (include all cash inflow from sales and services to calculate your total cash inflow)
10. other income (add any additional cash inflow from sources like interest or asset sales to your total cash inflow)
11. financing proceeds (include cash inflow from loans or investments as part of your total cash inflow)
12. refunds (add any cash inflow from returned goods or overpayments to your total cash inflow)
13. Step 3: List major cash outflows

15. payroll (net pay)

16. payroll taxes and benefit drafts

17. vendor payments

18. rent, utilities

19. marketing spend

20. loan payments

21. owner distributions

22. equipment or capex

23. When you calculate cash flow, it’s important to identify every cash outflow—these are all the uses of cash in your business. Listing your total cash outflows, such as payroll, vendor payments, and loan payments, helps you understand where your money is going and is essential for accurate cash flow analysis.
24. payroll (net pay)
25. payroll taxes and benefit drafts
26. vendor payments
27. rent, utilities
28. marketing spend
29. loan payments
30. owner distributions
31. equipment or capex
32. Step 4: Identify what changed in working capital
33. Compare AR, AP, and inventory from start to end of period to determine changes in net working capital. Ask:

35. Did AR increase? (net working capital increases, cash likely down)

36. Did AP increase? (net working capital decreases, cash likely up temporarily)

37. Did inventory increase? (net working capital increases, cash down)

38. Did AR increase? (net working capital increases, cash likely down)
39. Did AP increase? (net working capital decreases, cash likely up temporarily)
40. Did inventory increase? (net working capital increases, cash down)
41. Step 5: Reconcile and categorize
42. Separate operating vs investing vs financing. Categorizing cash flows into operating, investing, and financing activities is essential for evaluating a company’s liquidity, flexibility, and overall financial performance. This tells you what kind of cash movement happened, which affects strategy:

44. If investing is negative due to equipment purchases, that may be intentional.

45. If operating is negative due to AR, that’s a process issue.

46. If financing is propping up operations, you may need margin or collections changes.

47. If investing is negative due to equipment purchases, that may be intentional.
48. If operating is negative due to AR, that’s a process issue.
49. If financing is propping up operations, you may need margin or collections changes.

Bennett Financials tip: The goal isn’t perfect categorization on day one. The goal is to develop a reliable rhythm and improve the model monthly.

Cash flow and business valuation

Cash flow isn’t just about keeping the lights on—it’s also a key driver of your business’s value. Investors and buyers look closely at your company’s ability to generate consistent, predictable cash flow when determining what your business is worth. That’s because cash flow represents the money available to pay dividends, service debt, or reinvest in growth.

One of the most widely used methods for business valuation is the discounted cash flow (DCF) approach. This method estimates your company’s present value by projecting future cash flows and discounting them back to today’s dollars using a chosen discount rate. The DCF formula looks like this:

PV = CF₁ / (1 + r)¹ + CF₂ / (1 + r)² + … + CFₙ / (1 + r)ⁿ

How Bennett Financials and a fractional CFO improve cash flow calculation

Many businesses can calculate cash flow “once.” The bigger challenge is calculating it consistently, understanding it quickly, and using it to make decisions.

Regularly reviewing and reconciling cash flow statements helps maintain accuracy and supports the business’s financial health. For more details on our terms and conditions, please review our policies.

Fractional CFO support typically improves cash flow by:

• establishing a clean monthly close and reliable cash flow reporting
• building a rolling 13-week forecast with real assumptions
• integrating payroll taxes, benefits, and debt schedules
• improving AR systems to reduce cash conversion time
• identifying margin leaks that force cash dependence
• creating scenario plans so you can decide early (not late)

The outcome is not just a better calculation—it’s a better operating system for cash.

The Bennett Financials takeaway

Knowing how to calculate cash flow is important. But knowing how to manage cash flow is what changes a business. Cash flow is a critical factor in determining a business’s financial sustainability, growth potential, and overall financial performance, making it essential for maintaining a company’s financial health.

• Stop the cycle of annual financial clean-up
• Use the simple method for weekly visibility
• Use statement-based cash flow to explain profit vs cash monthly
• Use a 13-week forecast to make growth decisions confidently
• Understand IRS Form 8858 compliance requirements

At Bennett Financials, our fractional CFO work helps growing businesses move from reactive cash management to predictable cash planning—so you can invest, hire, and grow without constantly wondering what the bank balance will look like next month.