How to Track Cash Flow from Business Operations

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How to Track Cash Flow from Business Operations

How to Track Cash Flow from Business OperationsDetermining operating business cash flow helps you distinguish how much money your business makes from customers and operating activities, such as selling products and services, from money made from financing or investing. Calculating your operating business cash flow helps you manage your money and ensures you have enough funds from customers to cover operating expenses and costs.

There are two ways to calculate cash flow from operating activities: the indirect method and the direct method. The direct method considers the net income of a period. Depending on whether changes in current liability and asset accounts increased or decreased, the changes in current liability asset and (seems and should be before the word asset right?) accounts are either added to or subtracted from net income. If you are using the indirect method to arrive at a cash flow from operations figure, you must abide by the GAAP (Generally Accepted Accounting Principles), the standards established for U.S. accounting.

The direct method of tabulating cash flow from operating activities shows how cash outflow and inflow affects all current liability and asset accounts. If you use the direct method to determine cash flow from operating activities, you must also use the indirect method to calculate operating cash flows.

Differences Between GAAP and IFRS

When determining cash flow from operating activities, it is important to keep both GAAP and IFRS (International Financial Reporting Standards) standards of accounting in mind. While GAAP is most commonly used in the U.S. and IFRS is used most commonly outside of the country, if your company does international business, you may need to calculate cash flows using both methods. These accounting standards classify transactions differently.

What is classified as one type of cash flow under GAAP may be a transaction classified as a different cash flow under IFRS. For example, with IFRS a loan payment may be classified as a financing cash flow. With GAAP, it would be broken up into operating activity (the payment of interest) and financing (paying the principal). In both cases, however, money accepted from customers directly for goods and services is counted toward cash flow from operating activities.

No matter what standards your company uses, determining cash flow from operating activities can help you make business decisions and see where your money comes from. Determining your cash flow from operating activities can also help investors see how your business is faring.

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