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Net cash flow

What is it and how is it calculated?

Net cash flow is the difference between the cash coming into a business and the cash going out during a specific period of time, which is the net cash flow from three different areas:

  1. The cash involved in the operation of the business, including cash coming in from sales of services and/or products and cash going out for rent, wages, marketing, and bills.
  2. The cash involved in financing a business, including outgoing costs of paying off debt, cash to shareholders and dividend payouts, plus money incoming from borrowing or issuing equity.
  3. The cash involved in investment activities, including money incoming from investments or the sale of an asset, and money paid out for investments, such as purchasing equipment or assets.

Key Takeaways:

  • Net cash flow is the difference between incoming and outgoing cash in a business from three different areas: operating, financing, and investment activities.
  • Understanding net cash flow is crucial for business owners, as it helps to identify periods of high or low cash flow, which can be vital for planning and making financial decisions.
  • Calculating net cash flow involves subtracting outgoing cash flow from incoming cash flow over a specific period of time. The formula is Net Cash Flow = CFO (Cash Flow from Operating Activities) + CFI (Cash Flow from Investing Activities) + CFF (Cash Flow from Financing Activities).
  • Net cash flow is only one part of the overall picture when assessing a business's health, and it should be considered along with other financial metrics.

Why is understanding net cash flow important?

It is essential to have cash in a business to ensure its day-to-day running costs are covered; otherwise, you could quickly go out of business even if, over a longer period, your business is profitable. However, a positive net cash flow is not necessarily good, and a negative net cash flow is not necessarily bad; it all depends on where the cash has come from or where it is going.

Monitoring cash flow over a particular period is essential for understanding how your business is managing and will manage in the future. It enables you to follow the flow of cash and identify periods when incoming/outgoing costs are higher or lower. This information is crucial for planning, especially when decisions involve cash coming into or leaving the business. Ensuring you are not short of cash in your business could be the key to success.

Cash flow is also vital information for lenders and potential investors, as a positive cash flow is important for them to receive repayment of a loan or a return on their investment.

How do you calculate net cash flow?

Net cash flow is calculated by subtracting outgoing cash flow from incoming cash flow over a specific period of time.

Net Cash Flow = Incoming cash (Operating, Financial, Investment) – Outgoing cash (Operating, Financial, Investment)

Net Cash Flow = CFO + CFF + CFI

Where:

CFO = Net Cash Flow from Operating Activities

CFF = Net Cash Flow from Financing Activities

CFI = Net Cash Flow from Investing Activities

What are the limitations of net cash flow?

There are various limitations of net cash flow, which include:

  • The cash flow figure alone does not show the profitability of a company, just the cash available in a specific period.
  • Positive cash flow from a loan that needs repaying may not be positive for the business, and negative cash flow from an investment that could reap future rewards may not be negative. Therefore, care is needed to see the bigger picture.
  • The net cash flow figure is historical and, thus, unable to be used to forecast future cash flows.
  • This can make it difficult to assess a company’s liabilities accurately from this figure alone.
  • Net cash flow should be taken as only one part of an overall picture when assessing the health of a business.

Net Cash Flow vs. Net Income: What is the Difference?

Net cash flow and net income are both important financial metrics but serve different purposes. Net cash flow measures the actual movement of cash in and out of a business over a given period, while net income represents the company's profitability based on accrual accounting principles.

A company can have a positive net income but still face cash flow issues due to differences in the timing of cash inflows and outflows. Therefore, it is essential for business owners to analyze both net cash flow and net income to get a comprehensive understanding of their company's financial health.

Have you thought about invoice finance as a cash flow finance solution?

Invoice finance allows you to release cash quickly from your unpaid invoices.

As your lender, we can release up to 90% of your invoices within 24 hours. On payment of the invoice from your customers, we will then release the final amount minus any fees and charges. There are different types of invoice financing options available such as factoring (mainly invoice factoring and debt factoring) and invoice discounting to businesses depending on the situation and the level of control they require in collecting unpaid invoices.

We are an invoice financing company who offer a solution whereby payments are collected on your behalf managed by our team of expert credit controllers so you can focus on running your business. Our confidential invoice discounting solution is offered to businesses who want to maintain their own credit control processes, therefore this remains strictly confidential so your customers are unaware of our involvement.

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Business team having meeting about their net cash flow

The benefits of invoice finance companies such as Novuna Business cash flow

  • Boost your cash flow without having to wait up to 120 days for your customers to pay you

  • Release up to 90% of the invoice straight away, and the final 10% when the invoice is settled

  • Access funds within 24 hours from initial appointment with our revolutionary digital onboarding process

  • Benefit from our in-house credit control processes, allowing you to focus on running your business, instead of chasing clients for payment

  • Six month trial period followed by a rolling contract

Want to understand more Cash Flow Finance terms?

Our Cash Flow Resource Hub has been set up to help SME's with cash flow finance advice, tips and resources to help with their cash flow position.

We explore ways you can begin improving your cash flow situation and start getting your business on track to positive cash flow.

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