How to Calculate the Net Increase in Cash

The “net increase in cash” represents the overall change in a company’s cash and cash equivalents over a specific reporting period. This metric provides insight into a business’s ability to generate and utilize cash, serving as a significant indicator of its financial health and liquidity. A positive net increase suggests that a company generated more cash than it spent, while a negative net increase indicates the opposite.

Understanding Cash Flow Activities

A company’s cash movements are categorized into three main activities: operating, investing, and financing. These classifications help in understanding the sources and uses of cash within a business. The distinction between these activities is essential for a comprehensive financial assessment.

Operating activities encompass the primary revenue-producing activities of a business. These typically include cash received from customers for sales of goods or services and cash paid for operating expenses, such as payments to suppliers, employees, and for taxes and interest. This section reflects the cash generated or consumed from a company’s core operations, indicating its ability to sustain itself through its main business functions.

Investing activities involve the acquisition and disposal of long-term assets and other investments not classified as cash equivalents. Examples include purchasing or selling property, plant, and equipment, acquiring or selling other businesses, and buying or selling marketable securities like stocks and bonds. These activities show how a company allocates funds for growth and future production.

Financing activities relate to transactions that change the size and composition of a company’s equity and borrowings. This category includes cash inflows from issuing stock or debt, and cash outflows for repaying debt, repurchasing shares (treasury stock), or paying dividends to shareholders. These activities highlight how a company funds its operations and growth, and how it manages its capital structure.

Identifying Necessary Financial Information

To calculate the net increase in cash, information is drawn from two fundamental financial statements: the Income Statement and the Balance Sheet. These statements provide the raw data required for the cash flow statement.

The Income Statement provides the starting point for calculating cash flow from operating activities, specifically the net income figure. This figure represents the company’s profitability based on accrual accounting, which recognizes revenues when earned and expenses when incurred, regardless of when cash changes hands.

The Balance Sheet provides information on changes in assets, liabilities, and equity over time. Changes in current asset accounts like accounts receivable and inventory, and current liability accounts such as accounts payable, are crucial for adjusting net income to a cash basis within operating activities. Additionally, changes in long-term asset accounts and debt and equity accounts are used to determine cash flows from investing and financing activities, respectively.

Calculating Cash Flow from Operating Activities

Calculating cash flow from operating activities uses the indirect method, which reconciles net income to cash flow from operations. This method is often preferred due to its simplicity, as it uses information readily available from existing financial statements. This approach bridges the gap between accrual accounting profits and actual cash movements.

The process begins with the net income reported on the Income Statement. Since net income includes non-cash expenses and revenues that do not involve actual cash inflows or outflows, these items must be adjusted. Depreciation and amortization are common non-cash expenses that reduce net income but do not represent a cash outlay; therefore, they are added back to net income.

After adjusting for non-cash items, the next step involves accounting for changes in working capital accounts. An increase in a current asset, such as accounts receivable or inventory, means that cash was used or not yet received, so this increase is subtracted from net income. Conversely, a decrease in a current asset indicates cash was received, so it is added back.

For current liabilities, the adjustments work in the opposite direction. An increase in a current liability, such as accounts payable or accrued expenses, signifies that an expense was recognized but not yet paid in cash, effectively providing cash to the business, so it is added to net income. A decrease in a current liability means cash was used to pay down an obligation, so this decrease is subtracted.

Calculating Cash Flow from Investing and Financing Activities

The calculation of cash flow continues with investing and financing sections, which are generally more straightforward. These calculations involve tracking the direct cash inflows and outflows related to long-term assets, debt, and equity.

For investing activities, cash flow is determined by examining changes in long-term asset accounts. Cash outflows arise from the purchase of property, plant, and equipment (capital expenditures), the acquisition of other businesses, or the purchase of marketable securities. Conversely, cash inflows result from the sale of these same types of assets. The net cash flow from investing activities is the sum of these inflows and outflows.

Financing activities focus on how a company raises and repays capital. Cash inflows in this section include proceeds from issuing new stock or borrowing funds through loans or bonds. Cash outflows involve payments such as dividends to shareholders, the repurchase of a company’s own stock (treasury stock), or the repayment of debt principal. These activities reflect the transactions between a company and its owners or creditors.

Determining the Net Change in Cash

The final step in understanding a company’s overall cash movement involves combining the cash flows from all three activities. The net change in cash is calculated by summing the net cash flow from operating activities, investing activities, and financing activities.

This net change in cash is an important figure because it directly reconciles with the beginning and ending cash balances reported on the Balance Sheet. The beginning cash balance for the period, plus the net change in cash calculated from the statement of cash flows, should equal the ending cash balance for that period. This reconciliation serves as a check on the accuracy of the entire cash flow statement.