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cash flow

How to calculate net cash flow

Capitalise Mar 15, 2024

In this blog we’ll cover: 

  1. What is net cash flow? 
  2. How to calculate net cash flow 
  3. Why is net cash flow important?
  4. What is good net cash flow?
  5. What is the difference between cash flow and net cash flow? 
  6. Does net cash flow positive mean profit? 
  7. Tips for positive net cash flow

What is net cash flow?

Net cash flow is a way to measure the movement of cash into and out of a business over a period of time. 

The calculation of net cash flow involves summing up all cash inflows. This includes revenue from sales, interest income, and cash received from investments. Then you subtract all cash outflows. This will include expenses, payments to suppliers, taxes and interest payments. 

Net cash flow can be positive, indicating that the business has generated more cash than it spent during the period. Positive net cash flow is generally considered favourable as it reflects a healthy financial position. On the other hand, negative net cash flow may indicate liquidity issues or financial challenges that need to be addressed.

This can be an important way to assess the financial health and sustainability of your business. It reflects the company’s ability to generate cash to meet its obligations, invest in growth opportunities, and distribute returns to investors.
 

How to calculate net cash flow

The formula to calculate net cash flow is straightforward:

Net Cash Flow = Cash Inflows − Cash Outflows

 

You can work out your cash inflows by listing all sources of cash that are coming into your business, such as: 

  • Revenue from sales
  • Interest income
  • Rental income
  • Proceeds from investments or asset sales
  • Loans received

 You can work out your cash outflows by listing all expenses and payments, such as: 

  • Wages and salaries 
  • Cost of goods sold
  • Rent or mortgage
  • Utilities
  • Loan payments
  • Taxes
  • Purchases of equipment or inventory

Why is net cash flow important?

Understanding your net cash flow can be an important metric, providing a clear assessment of your business' financial health. 

By analysing cash inflows and outflows, you can gauge your business' ability to meet financial obligations, optimise your cash reserves, and adjust operations as needed. 

Net cash flow analysis can also help to inform strategic decision-making processes. It helps to manage debt obligations and identifies operational inefficiencies, ultimately enabling you to make informed and sustainable choices that align with your objectives.

What is good net cash flow? 

What is classified as “good” net cash flow will vary depending on your business, but typically a positive net cash flow is considered good. It indicates that the business is bringing in enough cash to cover all expenses and is financially stable. Consistently having a positive net cash flow could also mean your business has enough reserves to invest, which could lead towards growth. 

However having a negative net cash flow doesn’t necessarily signal financial strain or difficulty. In some cases, strategic investments in growth, or planned expansions can result in temporary negative cash flow. For example, your business could have just bought a new asset, or launched a new product. In these cases, having a negative cash flow could still position the business for success in the long term. 

What is the difference between net cash flow and cash flow?

Cash flow and net cash flow are two financial terms that focus on different two ways a business moves and uses money. 

Cash flow looks at all the money coming in and going out of a business, giving a full picture of their cash situation. Net cash flow only looks at the difference between the money the business makes and the money the business spends. It shows whether it's making more than it’s spending, or less. 

So, while cash flow tells you about all cash movements, net cash flow focuses on how well the business is managing its cash overall.

Does net cash flow positive mean profit?

Net cash flow positive means that the amount of cash flowing into a business is more than the amount of cash flowing out during that specific period of time. However, this doesn't directly equate to profit.

Profit is the amount of revenue that exceeds expenses during a specific period. It takes into account not only cash transactions but also non-cash items such as depreciation and amortisation.

While a net cash flow positive situation can often be indicative of a profitable business, it's possible for a company to have positive cash flow while still operating at a loss if non-cash expenses or other factors are involved. 

Tips for positive net cash flow 

If you’re trying to get to positive net cash flow, there are a few steps you can take, such as managing your expenses to reduce costs and looking at ways to increase revenue for increased cash inflows. 

You can also implement good credit control processes, such as setting clear payment terms and using an invoice template to increase your chances of getting paid on time. Before extending credit to customers, you could also consider running a company credit check to assess their payment history and business credit score. This will allow you to set realistic credit limits and help ensure your cash inflows are not reduced by late or non paying customers. 
You can check company credit scores using your Capitalise account, just login to get started. 

It’s also important to be able to access cash reserves for emergencies. You can forecast your cash flow to anticipate any potential issues ahead of time. If you spot a cash flow gap, you could apply for a business loan, a cash flow loan, or a business credit card, which could help to cover costs and avoid negative net cash flow. 

At Capitalise, we work with 100+ business lenders to help find the right option for your business. If you’re looking for working capital to cover a cash flow shortfall, just search for funding and one of our dedicated funding specialists can help. 

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