This has been a strange year for most businesses and consumers. Regardless of your situation, this makes for a great time to refocus your attention on cash flow.
Many business owners are fixated on sales and profits, but often forget that profits are not the same as cash flow. Occasionally, profits and cash flow can diverge by large amounts.
What causes a difference between these two figures? Oftentimes, working capital and fixed asset purchases are the two main culprits causing cash flow to be higher or lower than profits.
Let’s lay out the basic formula for operating cash flow to set the record straight:
| Revenue | |
| (less) | Cost of Goods Sold |
| GROSS PROFIT | |
| (less) | Operating Expenses |
| PROFIT | |
| (plus) | Depreciation Expense |
| (less) | Cash Paid for Equipment |
| (less) | Increase in Net Working Capital |
| CASH FLOW |
Determining your depreciation expense and cash paid for equipment is fairly easy.
Did you buy a truck or vehicle? Maybe a large machine? Anything you plan to depreciate over its useful life would fit into this category. These items should go to your Balance Sheet and not through your Income Statement until depreciated. Depreciation is a non-cash expense that gets added to net income when calculating cash flow.
Call or Contact Us for assistance in evaluating your cash flow situation!
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