As a small business owner, keeping an eye on your business's cash flow is a crucial part of successful financial management. Calculating your company's net cash flow is a crucial part of this. So, what is net cash flow? Keep reading for our short guide to the net cash flow definition and net cash flow formula.
What is net cash flow?
So, what is net cash flow? Net cash flow refers to the amount of money generated or lost by your business within a specified time period. It is mostly calculated by determining the difference between cash outflow and cash inflow in your business. Net cash flow in a business is made up of three key business activities:
- Investing activities: This refers to any capital generated by profitable investments or cash issued for investment or purchasing assets.
- Operating activities: This refers to the capital generated as well as used by your company's basic operations. This includes administrative expenses and customer receipts.
- Financial activities: This refers to any capital generated through loan agreements or cash issued to pay debts or dividends.
Net Cash Flow Formula
It is important to know how to calculate net cash flow. The net cash flow formula is as follows: Net Cash Flow = Net Cash Flow From Operating Activities + Net Cash Flow from Financial Activities + Net Cash Flow from Investing Activities.
Or, more simply: Net Cash Flow = Total Cash Inflows – Total Cash Outflows.
Net Cash Flow Example
Company X has a net cash flow from operating activities of GPB 200,000 and a net cash flow from other activities of GPB 100,000. However, losing money from investments has caused a net cash flow of -GPB 120,000. The net cash flow formula would be as follows: 200,000 + 100,000 – 120,000 = 180,000. With a net cash flow of GPB 180,000, Company X is doing relatively well and is likely to be able to invest in new products.
Why is Net Cash Flow important?
So, why is net cash flow important? There is a number of perks to knowing your company's net cash flow. It gives you an idea of how much cash your company generates and whether its cash flows are positive or negative. This can provide valuable insight into financial viability and improve the company's cash flow. This will lead to a long-term increase in net income. Gaining insight into your business's net cash flow also helps you to generate more consistent cash flows and improve your net profit. And last but not least, to identify net cash flow also informs you of potential negative cash flows and helps you prepare.
Looking at the net cash flow example above, if Company X was to suspect potential negative cash flow, its management team could consider options to save money short-term, such as decreasing expenditure on assets or putting a stop to any hiring processes.
Net Cash Flow Considerations
However, just trying to have a positive net cash flow can be harmful to your company. For instance, taking on debt can give you a short-term positive cash flow, but is not necessarily the best for your finances moving forward. Also, negative net cash flow can be a positive thing. It may be caused by investing a significant amount of money into your business's future which will inherently improve your company's long-term cash flow. Make sure to focus on more than just net cash flow when evaluating your business's financial health.
Net Cash Flow FAQs
- What is the definition of net Cash Flow?
Net cash flow refers to the amount of money generated or lost by your business within a specified time period
- Is Net Cash Flow the same as Net Profit?
No, net profit refers to the actual profit a company makes after the operating expenses have been paid.
- Is Net Cash Flow the same as Net Income?
No, net income refers to a company's income minus cost of goods sold, expenses, depreciation and amortization, interest, and taxes.