Knowing your net cash flow can make a difference between success and failure when handling your business finances. It’s a measure of your business’s financial health and can alert you to potential problems with your cash flow. But how do you find your net cash flow?
In this article, we’ll cover the term net cash flow and where you can find it so you can apprehend your business’s cash flow position and take the necessary steps to secure a healthy cash flow.
What is net cash flow?
Let’s first quickly recall what net cash flow is.
In the simplest terms, it is the amount of cash you have left after subtracting total cash outflows from total cash inflows. The result helps determine whether a business has a positive or negative balance, giving insight into how well you manage your cash and whether you can cover your financial obligations, thus, keeping your business on track without additional funding.
Analyzing your net cash flow will enable you to identify potential financial issues and help you make informed decisions about where your business should move. Knowing what constitutes a positive or negative net cash flow will also give you more insight into business performance and how effective your current strategies are.
To get a more accurate picture of your net cash flow, you might want to consider several factors, including accounting methods, inventory management, capital expenditures, taxes, dividends, and other investments. All of these components can significantly affect your net cash flow.
Calculating your net cash flow
The calculation of net cash flow – being the difference between all the cash coming in and out of your business – at its most basic representation, looks like the following:
Net Cash Flow = Total Cash Inflows – Total Cash Outflows
However, to better understand how to find your net cash flow, you need to know the components that make those cash totals. So let’s break them down and see how many calculations you might need to make to get the final result.
Basically, all your company’s earnings and expenses come from three types of activities, such as operating, financial, and investing. Altogether, they form those cash flow totals you need to calculate net cash flow. This way, you have an extended net cash flow formula to comprise all these components.
Net Cash Flow = Operating Cash Flow + Cash Flow from Financial Activities (Net) + Cash Flow from Investing Activities (Net)
You might want to look at each component in more detail to get a clear picture of where those figures come from.
Speaking of operating cash flow, we usually mean a company’s earnings and expenses from its normal operation (such as sales, cost of goods, etc.). So, to calculate net operating cash flow, you might want to add your net income and non-cash expenses, then subtract the change in working capital.
Operating Cash Flow = Net Income + Non-Cash Expenses – Change in Working Capital
Cash flow from financing activities usually implies the flows of cash used to fund the company. Financing activities might include transactions involving debt, equity, and dividends. Calculating cash flow from financing activities usually takes three steps. These include adding all cash inflows from issuing equity or debt, adding all cash outflows from stock repurchases, dividend payments, and repayment of the debt, and finally, subtracting the latter from the first.
Cash Flow from Financial Activities = Cash Inflows From Issuing Equity or Debt – (Dividends Paid + Repurchase of Debt and Equity)
Ultimately, you find your cash flow from investing, which is cash generated or spent from various investment-related activities, like capital expenditures, mergers and acquisitions, investments in securities, and so on. A formula for calculating cash flow from financing activities might look like this:
Cash Flow from Investing Activities = Purchase/Sale of Property and Equipment + Purchase/Sale of Other Businesses + Purchase/Sale of Marketable Securities
So now, as you have all the necessary figures involved, you can calculate your net cash flow.
How to find the net cash flow and its components?
Having all the necessary formulas ready for calculating net cash flow, you might still need to know where to go to search for the components – some of them might not be that obvious, especially if you’re not a finance specialist. Usually (and it makes sense), a business owner would delegate all things financial analysis to an accountant. However, they might want to know where the figures come from to have more control over their finances, particularly cash.
So, here is where financial statements come to light as the source of truth. The three most important, like basic for any business, are an income statement (or profit and loss), a cash flow statement, and a balance sheet. And here, we’ll focus on the cash flow statement.
As it derives from the name, the purpose of a cash flow statement is to display all the cash inflows and outflows involved in your business activities. A typical cash flow statement comprises three sections – cash flow from operating activities, cash flow from investing activities, and cash flow from financing activities. So the vast majority of the components required to calculate net cash flow will be displayed in the cash flow statement – you need to look through the corresponding section.
However, the best approach to analyzing the net cash flow might be to look at the cash flow statement in connection with the balance sheet and income statement. This way, the picture of a business’s financial health will be more comprehensive.
As a business owner, you need to know your net cash flow and how to find and calculate it, even if you have an accountant or a CPA firm responsible for your finances. It gives you more control and confidence in your business’s well-being and ensures you can see any possible issues coming in and timely react. Today, most accounting software available for small businesses can generate accurate financial statements, including the cash flow statement, making it easier for you to keep track of your cash.