We can’t trivialize the need to be attentive to your business’s cash flow. It can be the divergence between making gains and quitting the business. Positive net cash flow is a good sign that your business is good to go. This article will guide you through a thorough knowledge of net cash flow, how to calculate it, a simple formula, and its importance.
WHAT IS NET CASH FLOW?
A company’s net cash flow can be defined as the difference between its cash inflows and outflows within a specific period. The cash flow simply refers to the income that comes in, while the cash outflow refers to the income that goes out. Furthermore, a company is said to have a positive cash flow when it has deductible money after payments of all debts and operating costs. Also when generating income and the number is positive, it means you’re making money when the number turns to be negative it simply implies that your business is struggling. Furthermore, it is a lucrative measure that portrays the amount of income generated or lost in a business during a period, It is also the amount of income left after a business transaction has been completed and all deductions subtracted.
It comprises of three-component and they are
#1. Operating Activities:
This is the income generated and spent by a firm to run well-standard business operations. This comprises cash payments from the cost of goods sold, administrative expenditures, customer receipts, and advertisements.
#2. Investing Activities:
This is the income accumulated by profitable investments issued to make an investment or purchase equipment or property. or cash issued to make an investment or purchase fixed means.
#3. Financing Activities:
This is the income generated when businesses pay interest on investments or purchase fixed assets equipment or property.
HOW TO CALCULATE NET CASH FLOW
The formula helps to dictate if a business is doing well or crumbling. Meanwhile, It is a very essential formula as it permits the company to dictate the amount of income generated, whether it’s positive or negative. To compute net cash flow you need to find the difference between cash inflow and the cash outflow, the cash flow formula is very easy to use.
Formula
Cash inflow- Cash outflow= Net cash flow
Cash inflow includes Grants, equipment sales, interest earned, property sales, loan receipts, etc while the cash outflow includes Fuel and transportation, rent, utilities, taxes, licenses, shareholder payout, property purchase, etc.
There is also an extended formula for the net cash flow, the cash flow can also be separated by categorizing the operating, investment, and financial activities.
Formula
Operating activity cash flow (OCF) + Investment activity cash flow ( ICF) + Financing activity cash flow ( FCF)= Net cash flow.
Operating activity cash flow:
Examples of operating activity cash flow include the change in net income for the period as well as the modifications to restore net cash provided or used in operating activities. Operating activity cash flow is a proper sign that the business is growing.
Examples of investment activity cash flow: can be seen when a firm invests their major cash flow in properties or other merchandise as an investment, and the cash inflow here would be a dividend received.
Financing activity cash flow
This is the last activity. In this, the firm would know how it has raised its funds, which can be internal, i.e., shares, or external, i.e., through a loan. Examples of financing activities cash flow are moves from a loan to finance the business, and illustrations of outflows are repayments of the loan.
EXAMPLES
Using the formula, let’s go through some examples.
Example #1
Miss B owns a fashion house. The cash flow for April breaks down like this.
Operating activities- Cash flow of $60 000 came in and $50 000 went out
Investing activities- Cash flow of $4 000 came in and $6 000 went out
Financial activities- Cash flow$20 000 came in and $5 000 went out
Formula
Operating activity cash flow (OCF) + Investment activity cash flow ( ICF) + Financing activity cash flow ( FCF)= Net cash flow.
OCF= $ 60 000-$50 000
$10 000
ICF = $4000 – $6 000
$2 000
FCF= $20 000 -$5 000
$15 000
| Activities | Amount | Inflow or Outflow |
| Operating activity | $10 000 | Inflow |
| Investment activity | $2 000 | Outflow |
| Financing activity | $15 000 | Inflow |
Net cash flow= $ 27 000
However, the investment didn’t do so well, but OCF and FCF balance it out and
The investments didn’t do so well, however, the OCF and FCF balance it out and gave her a positive result.
When you understand your net cash flow, it enables you to have a good idea of your business’s ability to generate income in a given period. Also tracking it timely will enable your company to be profitable in both the short and long terms.
Example #2
David from company B wants to determine the NCF of his business over the last month, below is his statement of cash flow:
Operating activities: $50 000
Investment activities: $70 000
Financing activities: $15 000
| Operating activities | $50 000 | Inflow |
| Investment activities | $70 000 | Outflow |
| Financing activities | $15 000 | Inflow |
Here, we can use the first formula to calculate the outcome.
Cash inflow- Cash outflow
Cash inflow= $50 000 + $15 000
= $65 000
Cash outflow = $70 000
Net cash flow= $65 000-$70 000
= $15 000
The NCF arrives with a negative cash flow of $5,000. Even though one period of negative outcome of cash flow isn’t a bad sign. David would want to make sure it doesn’t occur repeatedly.
Example #3
| Operating activities | $300 000 | Inflow |
| Financing activities | $200 000 | Inflow |
| Investment activities | $120 000 | Outflow |
Net cash flow= $300 000 + $200 000 – $120 000
=$380 000
With a net cash flow of $380 000, company A is doing well in the business.
Is Net Cash Flow the Same as NPV?
No, they are not. Net cash flow is the difference between a company’s cash inflows and outflows within a given period of time. While, Net present value is the difference between the present value of cash inflows and cash outflows over a period of time.
What Is the Difference Between Net Cash Flow and Profit?
Profit shows the amount of money left to a business after all deduction for expenses have been made. On the contrary, net cash flow indicates the balance of cash inflow and cash outflows.
What Are the Three Types of Cash Flow?
- Operating cashflow.
- Investing cashflow.
- Financing cashflow.
What Is a Negative and Positive Cashflow?
Negative cashflow shows when a business has more outgoing money when compared to incoming money. While Positive cashflows indicates when a company is experiencing increased incoming money than outgoing money.
How Can Negative Net Cash Flow Be Improved?
- Maintain a regular cash flow forecast.
- Reduce and manage business expenses.
- Create multiple revenue streams.
- Watch of your inventory.
- Create an emergency budget for emergency expenses.
CONCLUSION
The net cash flow helps companies in developing new products, paying dividends to shareholders, or repaying their loans. It enables the firms to execute their daily routine business smoothly. This is the reason why some firms value it more than any other metric of finance. When you learn how to calculate net cash flow it aids you to determine how much income your firm generates and whether its cash flows are positive or negative. The net cash flow, as mentioned earlier, is an essential concept and is the fuel that aids companies in developing new products. The net cash flow formula gives you a clear view of how your business is doing. Therefore, a period of negative cash flow isn’t a bad thing, just like a period of positive cash flow isn’t a good thing.
FAQs On the Net Cash Flow
What is the main aim of net cash flow?
The main aim of the net cash flow is to enable a company to be able to dictate the inflow and outflow of income generated in the business and also aid in improving the growth of the business
How to calculate the net cash flow?
One can calculate the net cash flow by Subtracting the cash inflow from the cash outflow thus: Cash inflow- Cash outflow= Net cash flow. There is also an extended formula for the net cash flow, the cash flow can also be separated by categorizing the operating, investment, and financial activities.
Can a negative outcome of a company's net cash flow determine its growth?
No, it doesn’t determine the growth of a company rather it gives you a clear view of how your company is doing.
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