Direct Method Cash Flow Statement

The cash flow from operating activities for a business can be presented using either the statement of cash flows direct method or alternatively the indirect cash flow statement. The direct method cash flow shows gross cash receipts and payments whereas the indirect method cash flow shows net income and adjusts this for balance sheet movements.

Free Cash Flow Calculator

The free cash flow measures the amount of cash flow available for a business to use for growth and to take advantage of expansion opportunities.

The Excel free cash flow calculator, available for download below, is used to compute free cash flow by entering details relating to the net credit sales and the opening and closing accounts receivable balances.

Cash Conversion Cycle

When a business trades, it purchases goods, holds them as inventory, pays for the inventory, converts them to a product for sale and sells them on credit, and finally it collects the cash from the sale.

The cash flow cycle is the time period from when cash is paid out for inventory, to when cash is received from sales. The cash conversion cycle differs from the operating cycle as it allows for the accounts payable payment period. It measure the time between the payment for inventory and the receipt of cash from customers, whereas the operating cycle measures the time between purchasing the inventory and receiving cash from customers.

Operating Cycle

When a business trades, it purchases goods, holds them as inventory, converts them to a product for sale and sells them on credit, and finally it collects the cash from the sale. The operating cycle in financial management describes the time it takes to complete this process in days.

The operating cycle definition is the time period it takes from inventory purchase until the receipt of cash.

Free Cash Flow

Free cash flow (FCF) is calculated by taking the operating cash flow and deducting the capital expenditure.

The purpose of free cash flow is to see what cash is available (free) from the operations of the business after allowing for cash to maintain the current growth rate. This free cash flow is then available to improve growth by taking advantage of expansion opportunities, invest in new products, and to reduce debt and pay dividends to equity providers.

Working Capital Calculator

The working capital calculator can be used by any business to estimate the cash needed to fund its working capital.

Working capital is the amount of cash needed to fund the normal day to day trading operations of the business. In a simple business it would be calculated as inventory + accounts receivable – accounts payable which represents the funding needed to buy inventory and provide credit to customers, reduced by the amount of credit obtained from suppliers.

Operating Cash Flow from Trading Activities

Operating cash flow is that part of the cash flow generated by the trading activities of the business. It is basically the net income of the business adjusted for depreciation and amortization, and movements in working capital (inventory, accounts receivable, and accounts payable). It represents cash in from selling goods and services less cash out from paying the costs of selling goods and services.