Cash flow is the final amount of cash that goes into the company’s bank account after taking into account all kinds of expenses. The first thing to keep in mind about this concept is that revenue is not equal to cash. It is possible that you will get $1 million of revenue this month. You might account for it but you will not get the cash, maybe for the next 6 months. So that $1 million could be revenue but your cash flow does not increase by that $1 million. The cash flow only increases by your revenue minus your expenses and adding back loan cash expenses. So typically to calculate your cash flow we will start with what is called an EBITDA. EBITDA is typically - Earnings before interest, tax depreciation and amortization. To this EBITDA we will add back depreciation and amortization, because depreciation and amortization are non-cash expenses. That is; even though you recorded as expenses in your income statement, no cash has been paid out for your depreciation and amortization. So the first thing you will add back depreciation and amortization to your operating income. From this you will subtract your capital expenditure is this item on your balance sheet where the company is spending money to buy inventory, equipment, office furniture, etc. Because this capital expenditure has a long shelf life, it is not shown on the income statement as an expense but that does not mean you will not spend the money. You have paid cash from your balance sheet to build up an asset or capital expenditure so that cash expense should be subtracted from your EBITDA. So your EBITDA minus your capital expenditure is equal to what is called your Cash Flow.
Nov 01 2013 10:45 AM