NET CASH FLOW: Definition and Formula

Net Cash Flow
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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

ActivitiesAmountInflow or Outflow
Operating activity$10 000Inflow
Investment activity$2 000Outflow
Financing activity$15 000Inflow

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 000Inflow
Investment activities$70 000Outflow
Financing activities$15 000Inflow

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 000Inflow
Financing activities$200 000Inflow
Investment activities$120 000Outflow

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

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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