If you want to calculate your net cash flow (the gain or loss of funds for a specific period of time and after all debts have been fulfilled), you will need to use a net cash flow formula. This article will cover everything you need to know about this process and go through a few examples covering the most common activities involved in the calculation.

How do you calculate net cash flow, and what is it, exactly?

When we talk about net cash flow, we refer specifically to the gaining or losing of funds over a determined time (a month, a year, etc.) For example, if a company has covered all operating costs, is making all debt payments, and still has a surplus of cash, you can say it has a positive cash flow. On the contrary, if a business is still paying more dividends for liabilities than it makes in operation, it has a negative cash flow.

Now, just because a company has a negative cash flow at the moment, it doesn’t mean it cannot pay its obligations. It just means that, for that chosen period of time, the amount of cash it received was not enough to cover the required expenses. However, it could have used other vehicles to meet the payments, such as accruing additional debt that didn’t need a lump deposit.

Activities that contribute to positive net cash flow and negative cash flow

Before we move on to the formula required to calculate a company’s net cash flow, it’s key to first identify which activities contribute to the cash flow statement. The two essential ones are:

  • Positive cash flow activities: For example, reduced obligations, increased sales profits, incurring new debt, or receiving a deposit for a lump sum loan.
  • Negative cash flow activities: For instance, the purchasing of assets, loans received, or cash out due to acquisitions and mergers.

The main reason businesses typically want a positive cash flow is that it shows it is liquid, meaning it has enough capital to cover its obligations and won’t require additional funding to pay its bills. However, as we mentioned, certain activities that result in a positive flow might not reflect positively on your company’s image. For example, if you received money because you incurred new debt or sold assets below market value just to gain liquidity.

On the other hand, it’s not uncommon to have a company with negative cash flow that is still doing good. For instance, if it decides to purchase long-term fixed assets such as equipment and property, which they can also do dipping into cash reserves.

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Analysing the entire cash flow statement

The only way to determine if a negative flow is, in fact, a bad situation for a firm (and a positive one a good sign of a company’s financial health) is to analyse all statements made by a company. You should always try to go into operating cash flow and operating activities, cash flow from investing, cash flow from financing, and all cash inflows and cash outflows in as much detail as possible.

Calculating the free cash flow can help you evaluate whether the money that left the company has done so after paying capital expenditures or not. So, let’s now look at the net cash flow formula and how to use it.

The net cash flow formula

The net cash flow formula (or NCF for short) calculates the total cash inflow of a company and subtracts the cash outflow over a period of time. In fact:

NCF= total cash inflow – total cash outflow

However, this formula can be extended to include operating activities, investing activities, and financial activities.

NCF= Net cash flows from operating activities + Net cash flows from investing activities + Net cash flows from financial activities

Let’s look at these elements in some more detail:

  • Operating activities refer to cash flows coming from, for example, salaries paid to workers, cash paid to vendors and suppliers, income tax expenses, share-based compensation expenses, depreciation, amortisation, and more. The first line of the operating cash flow calculation tends to be the net income, which values a company’s profitability for the period. There are also changes in working capital that represent the difference between liabilities and assets.
  • Investing activities have to do with cash inflow from general investing initiatives such as the sale of securities or properties or the purchase of fixed assets and capital expenditure. For example, selling socks and bonds and buying equipment or setting up a new plant, but also acquisitions of other businesses, divestitures, and proceeds from selling PP&E.
  • Financial activities, lastly, are about inflows from loans or outflows for loans. For instance, the financial flow can include receiving cash from issuing stock or spending it by purchasing shares or paying dividends to stakeholders.

A net cash flow example

Here’s an example of a net cash flow formula calculation for a business over a month.

  • Cash flow from operating activities: £60,000
  • Cash flow from investing activities: – £80,000
  • Cash flow from financing activities: £25,000

If we want to calculate the NCF, the formula would be:

NCF= £60,000 + (- £80,000) + £25,000

Which results in a positive cash flow of £5,000.

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Final Thoughts

Being able to calculate your net cash flow and operating cash flow can help reveal your company’s ability to make a profit. It can also help you secure funding opportunities as it gives potential investors an insight into your financial health. However, the formula we covered doesn’t always tell the whole story of your business. This is why it’s always essential to analyse your NCF over many periods.

Funsquire helps startup and scaleup companies grow by allowing them to easily access capital non-dilutive funding without having to sell equity. If you need help determining your net cash flow or are looking for new ways to expand your business, don’t hesitate to contact us today to arrange a chat with our experts.

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