Is Cash Flow Calculated Monthly or Yearly?

Cash flow means the money coming in and going out of a business. It’s the real cash a company gets and has to pay. Cash flow is super important. A business needs to have enough cash to pay its bills. If more cash is going out than coming in, the company could go broke.

Inflows and Outflows

There are two main parts of cash flow:

Cash inflows – This is money coming into the business. It could be from selling stuff, getting loans, or people investing in the company.
Cash outflows – This is money the business has to pay out. Things like buying supplies, paying workers, rent, taxes, and loans.

The trick is to always have more cash inflows than outflows. That means the business has positive cash flow and can keep going.

Figuring Out Cash Flow

Adding It All Up

To figure out cash flow, a business has to add up all the cash that came in and went out over some time. This could be a week, a month, or a year.

Let’s say Joe has a lemonade stand. In one week, this is what happened:

Monday: Joe got $20 from his mom to buy lemons and sugar
Tuesday: He spent $15 on supplies and made $40 selling lemonade
Friday: He spent $5 on more lemons and made another $35

So for the week, Joe’s cash inflows were:

$20 from his mom
$40 from sales on Tuesday
$35 from sales on Friday
Total inflows = $95

And his cash outflows were:

$15 for supplies on Tuesday
$5 for more lemons on Friday
Total outflows = $20

To get his cash flow for the week, Joe subtracts the outflows from the inflows: $95 – $20 = $75

Joe’s cash flow for the week was $75. Nice job, Joe!

The Cash Flow Statement

Big companies do pretty much the same thing as Joe, but they use something called a cash flow statement. This is a financial report that shows all the cash inflows and outflows for a certain period of time.

The cash flow statement has three main parts:

Cash flow from operating activities – This is cash from the company’s main business, like selling products or services.
Cash flow from investing activities – Cash used to buy assets like equipment, or cash made from selling assets.
Cash flow from financing activities – Cash from loans, paying back loans, and money from investors.

When to Check Cash Flow

Monthly or Yearly?

So should a business check its cash flow every month or every year? The answer is: both!

Monthly Cash Flow

It’s a good idea to track cash flow every month. This is called monthly cash flow. By checking monthly, the business can see if it’s making enough cash to pay its bills. If cash is getting low, the company can make changes quickly before things get really bad.

Monthly cash flow also helps with planning. The business can look ahead and guess how much cash will come in and go out the next month. This can help them decide things like:

Can we hire more people?
Should we buy more supplies?
Can we pay off some loans?

Yearly Cash Flow

While monthly cash flow is great for short-term planning, it’s also important to look at the bigger picture. That’s where yearly cash flow comes in.

Yearly cash flow shows the company’s total cash inflows and outflows for a whole year. This helps the business see trends over time. Maybe sales are higher in the summer. Or maybe they always spend more in December.

Yearly cash flow is good for long-term planning. The company can set goals for the next year, like increasing sales by 10% or cutting costs by 5%. They can also make big decisions, like buying new equipment or expanding to a new city.

Why Cash Flow Matters

Cash flow is like the heartbeat of a business. If it stops, the business dies.

Avoiding Bankruptcy

The number one reason businesses fail is because they run out of cash. They might be making a profit on paper, but if they don’t have enough cash to pay their bills, they’re in trouble.

That’s why tracking cash flow is so important. By keeping a close eye on cash inflows and outflows, businesses can avoid running out of money.

Planning for the Future

Cash flow also helps businesses plan for the future. By looking at past cash flow and making smart guesses about the future, companies can make better decisions.

For example, let’s say a toy store’s cash flow statement shows they always sell a lot more toys in December. They can use this information to plan ahead. They might order extra inventory in November so they’re ready for the December rush.

Or maybe a restaurant sees that their cash outflows are higher than their inflows. They can look for ways to cut costs, like finding a cheaper food supplier or cutting back on staff hours.