What is net cash flow?

Net cash flow

Net cash flow is the amount of money that flows through a company in a set period - and it’s an effective way to keep track of the health of your business, in addition to predicting its future viability.

To understand net cash flow in its simplest form, this short guide breaks down what the metric is, why it’s important, and how you can implement it in your business strategy:

What is net cash flow?

Net cash flow is a way to measure how much money a business has handled during a set period. It’s the difference between monetary incomings and outgoings.

The funds that net cash flow measures come from three primary sources:

• Standard business operations
• Investment returns
• Any financial assistance (loans)

When incoming funds outweigh outgoing funds, your business has ‘positive cash flow’. But when the opposite is true, your business has ‘negative cash flow’.

When it comes to cash flow vs profit, the difference is that profit represents the funds remaining once all business overheads and bills have been paid, whereas cash flow indicates the amount of money moving through your business.

So, why measure net cash flow?

In May 2021, we surveyed 366 small businesses owners and asked if they had an updated cash flow forecast (which is built from understanding net cash flow).   Nearly 50% of them did not – which means nearly 50% are missing a critical view to understand the health of their business.  Measuring net cash flow gives you the ability to understand how much cash your business has to hand, giving you guidance on the amount of money you have available to cover the important stuff like bills, hiring, or investments.

You’ll also enjoy a detailed snapshot of your business’s health during a specific period. Regularly achieving positive cash flow is an excellent sign that your business is thriving and expanding. The occasional negative cash flow result can also help you to notice operational issues. For the most accurate information, try to look at your results in context and vary the time frames you use to measure net cash flow.

Finally, while it  may seem simple, paying attention to your company’s biggest cash generators and expenditures is key when you’re trying to keep operations as lean as possible. Investing the time to understand the state of your cash flow will help fine-tune your approach to finance.

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How to calculate net cash flow

Net cash flow is surprisingly simple to calculate;  all you need to do is find the difference between the amount of cash entering and leaving your business in a set period:

Net Cash Flow = Inflowing Cash – Outflowing Cash

So, if your business had a total cash inflow of £50,000 and a total cash outflow of £35,000 in a given quarter, the equation would become:

Net Cash Flow = £50,000 – £35,000

In this case, net cash flow would be £15,000, indicating the business has positive cash flow.

It’s also possible to work out net cash flow by combining the cash generated from the sources outlined above. For example:

Net Cash Flow = Cash from Business Operations + Cash from Investment Returns + Cash from Financial Assistance

So, if your business generated £50,000 from business operations, and £20,000 from investments, but had to repay £15,000 in loans, the net cash flow formula would become:

Net Cash Flow = £50,000 + £20,000 – £15,000

In this case, net cash flow would be £55,000, indicating that the business has positive cash flow.

Remember, it’s important to measure net cash flow during various time frames to avoid generating biased results. Try to calculate both monthly and annually, as this will give you the most accurate information on cash trends within your business and will allow you to predict viability in the long and short term.

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