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Posted by: Charles P Myrick CPA Posted on: Aug 07 2020

How to Measure the Impact of Revenue on Cash Flow

Are you able to measure the effect on your cash flow if revenue decreases 10%-30% or more? Managing cash flow can be a challenge for many small businesses. In a cash flow statement, revenue is counted right away, even when it's not yet received from the customer. If your income decreases, there could be a delay in how it may affect your cash flow.

Here are three formulas to measure the impact of revenue on cash flow.

Free Cash Flow 

Free cash flow measures how much cash a company has at its disposal, after covering the costs associated with remaining in business.

The free cash formula helps you figure out how much available cash you can use immediately. You'll need to know a few financial numbers to calculate this amount. The numbers you need include your net income, depreciation or amortization, working capital, and capital expenditures. Add your net income and depreciation or amortization together and then subtract your working capital and capital expenditures from this amount.

This formula gives you a big picture view on how much you can invest back into the business. If your revenue decreases, it will negatively impact your free cash flow. However, your daily business operations may be unaffected, depending on the numbers. If your revenue numbers keep declining steadily, this formula can indicate how long you can stay in business or if you can expand.

Operating Cash Flow

Operating Cash Flow (OCF) is the amount of cash generated by the regular operating activities of a business within a specific time period. 

Operating cash flow can give you a better idea of your cash flow for everyday business activities. It can also help you secure funding from banks and venture capital firms. To calculate this information, you'll need to know your operating income. Your operating income is the amount of operating expenses subtracted from the total revenue. Add your operating income and depreciation together, subtract the amount you pay in taxes and add your change in working capital to calculate your operating cash flow.

Having a negative operating cash flow doesn't necessarily mean that your business is in severe financial trouble. It would help if you considered other factors to indicate the complete financial health of your business. A couple of these factors include your ability to acquire funding and the amount of business assets you have.

Cash Flow Forecast

If you want to know how revenue impacts cash flow in the future, a cash flow forecast can be highly beneficial. Take the amount of cash you have for the beginning of the period and subtract how much you expect to go out in expenditures. If you have a significant decrease in revenue, this forecasting will help you spot potential issues immediately and address them. You may need to find ways to increase sales or reduce expenditures. Depending on the numbers, you may need to acquire funding or sell off assets.

Cash Flow Management Solutions

Paying attention to how revenue affects cash flow is crucial for the success of your business. It can help you anticipate any issues that can negatively impact your daily business operations. Proactive planning helps your business stay on track with its strategic goals in any economic environment.

For assistance in measuring revenue's impact on cash flow, contact Myrick CPA today. As planners, we are here to assist you in navigating simple solutions.

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Charles and the Myrick CPA Team

Charles P Myrick CPA, Washington DC tax preparation firm, specializes in accounting services for small business start ups and entrepreneurs. If you are a new entrepreneur, give us a call. We invite you to learn more about the small business accounting services that are available: (202) 789-8898.