“Tiền vô như nước” – This Vietnamese proverb, meaning “money flows like water,” highlights the importance of understanding cash flow. Whether you’re running a business or managing your personal finances, knowing where your money is going is crucial. Today, we’ll be diving deep into a specific type of cash flow – cash flow from operations – and learning how to calculate it.
What is Cash Flow From Operations?
Imagine your business as a bustling market stall. Cash flow from operations (CFO) is the money that flows in and out from your core business activities, like selling delicious “bánh mì” sandwiches or beautiful silk lanterns. It excludes any money earned or spent on investments or financing activities.
Why is Calculating Cash Flow From Operations Important?
“Của bền tại người” – Good things last when taken care of. Just like a well-maintained rice paddy yields a bountiful harvest, understanding your CFO helps you:
- Assess your business’s health: A healthy CFO indicates your core operations are profitable.
- Make informed decisions: Knowing your CFO helps you make decisions about expenses, investments, and growth opportunities.
- Secure financing: Lenders and investors look at CFO to assess your ability to repay loans.
How To Calculate Cash Flow From Operations: A Step-by-Step Guide
Let’s break down the calculation into bite-sized pieces, easier to digest than a plate of “gỏi cuốn.” You can use either the direct method or the indirect method. We’ll focus on the more commonly used indirect method here:
1. Start with Net Income: This is the profit your business earned during a specific period.
2. Add Back Non-Cash Expenses: These are expenses that don’t involve actual cash outflow, like depreciation.
3. Adjust for Changes in Working Capital:
- Increase in current assets (like inventory): Subtract this amount, as it represents cash outflow.
- Decrease in current assets: Add this amount, as it represents cash inflow.
- Increase in current liabilities (like accounts payable): Add this amount, as it represents cash inflow.
- Decrease in current liabilities: Subtract this amount, as it represents cash outflow.
Example:
Imagine your business, “Hoa’s Handicrafts,” had a net income of $50,000. You had $5,000 in depreciation, your inventory increased by $2,000, and your accounts payable decreased by $1,000.
Calculation:
$50,000 (Net Income) + $5,000 (Depreciation) – $2,000 (Increase in Inventory) – $1,000 (Decrease in Accounts Payable) = $52,000 Cash Flow From Operations
Analyzing Your Cash Flow From Operations
A positive CFO is generally a good sign, but it’s important to look at the bigger picture. Compare your CFO over different periods and against industry benchmarks to get a clearer picture of your business’s performance.
Conclusion
“Năng nhặt chặt bị” – By saving diligently, even small amounts add up. Just like careful budgeting, calculating your CFO provides valuable insights into your financial health. By understanding this crucial metric, you can make informed decisions and ensure your business flourishes like a lotus flower in bloom.
