Net Cash Flow

The world of finance is full of metrics and measurements, most of which have complex formulas and incredibly specific use cases.

If you’re trying to narrow down and focus on the metrics that really make a difference, you would be remiss if net cash flow didn’t make it onto your list.

Net cash flow is vital to your company’s ongoing operations. 

If you don’t have sufficient cash on hand, you can’t pay down your liabilities and regular expenses, let alone think about investments and expansion.

This article will be your guide to net cash flow. We’ll cover what it is, how to calculate it, how the various components of the formula impact the final result, and, of course, how to interpret and analyze your own figures to drive strategic growth plans.

What Is Net Cash Flow?

Net cash flow represents the amount of money your company produced (or lost, in the case of negative cash flow) during a given period.

Net cash flow is commonly tracked on a monthly basis, but it can also be measured quarterly or annually.

Like most metrics, net cash flow is best understood through its formula. Let’s take a look.

How To Calculate Net Cash Flow

The simplest version of the net cash flow formula looks like this:

Net Cash Flow = Total Cash Inflows – Total Cash Outflows

You simply add up all of your cash inflows (the money that came in from customers who paid you or interest paid to you by your bank) and all of your outflows (money you spent on expenses like wages and rent).

Then, you subtract outflows from inflows, and you have your net cash flow.

For example, let’s say you earned $250,000 in revenue this month and spent $180,000 on expenses.

Your net cash flow would be a healthy $70,000 ($250,000 – $180,000).

While this is a fast and effective way to arrive at the final number, more often than not, we want to dive a bit further into the details to understand the full financial picture.

That’s why you’ll see the typical cash flow statement—the financial report that formally calculates net cash flow—divided into three components:

  1. Net Cash Flow from Operating Activities 
  2. Net Cash Flow from Financing Activities
  3. Net Cash Flow from Investing Activities

Components of Net Cash Flow

Operating Activities

Cash flow from operating activities measures how much money your company brings in for its typical, ongoing business activities.

For example, if your business is a clothing retailer, then the income you receive from selling clothing items, as well as the expenses related to producing them, will be included here.

Learn more about net cash flow from operating activities in our guide: Cash Flow From Operating Activities.

Financing Activities

Cash flow from financing activities outlines the cash inflows and outflows related to funding your business.

For instance, if you were just issued a business loan, received funding from an angel investor, or paid out dividends to shareholders, these activities would show up on this section of the cash flow statement.

Learn more about net cash flow from financing activities in our guide: Cash Flow From Financing Activities.

Investing Activities

Cash flow from investing activities includes cash spent or generated on investment-related endeavors.

For instance, if your clothing company just bought a new set of sewing machines, this would be an investment activity that should be reported here.

Learn more about net cash flow from investing activities in our guide: Cash Flow From Investing Activities.

Full Net Cash Flow Formula

Each of the three components of net cash flow is already net; they have already accounted for both inflows and outflows for the period in question.

So, our net cash flow formula using this approach simply requires us to add up all three components:

Net Cash Flow = Net Cash Flow from Operating Activities + Net Cash Flow from Financial Activities + Net Cash Flow from Investing Activities

Understanding And Interpreting Net Cash Flow

Net cash flow is one of the most crucial metrics to understand due to its impact on not only profitability but also the ability to service your debts and expenses.

Think about it like this:

If cash flow is positive, you earned more than you spent for the period. The opposite is true for negative cash flow.

If you’re bringing in more cash than you’re spending, then you’ve got something left over for expansion, future investments, or payouts to shareholders.

If the opposite is true, and you’re spending more than you’re earning, then you could be eating into your capital reserves and soon run into trouble.

However, what’s most important here is to understand net cash flow trends over time, rather than in a vacuum.

Let’s say, for example, that you’re consistently cash flow positive for the first six months of the year. Come July and August, you’re cash flow negative.

Does this spell disaster for the rest of the year?

Not necessarily.

By diving into the three components of net cash flow (remember those?), you might see that, in fact, the reason you’re cash flow negative is due to large investments in capital expenditure.

But cash flow from operating activities is still healthy and is actually growing.

In this case, two months of negative net cash flow is not such a bad thing, and actually represents a long-term investment in your own business (something potential investors may favor).

The opposite scenario might also be true, where the company is significantly cash flow positive but is indeed neglecting to invest further in future growth opportunities.

So, with all of this complexity, how should you interpret your own net cash flow values?

Best practice here is to track net cash flow as a trend over time, and to use historical data to create cash flow projections.

By looking at trends, you can see whether net cash flow is consistently increasing or decreasing and how this relates to revenue-driving activities, capital investments, or debt financing decisions.

Then, you can extrapolate that data into the future by way of a cash flow projection, allowing you to make more data-driven strategic decisions for future business developments.

Learn more: How to Create a Cash Flow Projection: Step-by-Step Guide.

Track Net Cash Flow In Finmark

In sum, net cash flow is a critical finance metric that warrants constant attention.

You’ll want to view net cash flow trends over time, so you can monitor increases or decreases in available cash in order to make more informed decisions.

Moreover, you’ll want to see how net cash flow stacks up in real time, as this metric has short-term implications as well—if you don’t have enough cash on hand to pay next month’s bills, you might want to do something about it.

Today’s data-driven financial leaders use Finmark from BILL—the financial planning platform for SMBs—to track and monitor net cash flow without spending hours tediously creating financial reports.

Find out for yourself how Finmark can transform your finance operations with a free 30-day trial.

This content is presented “as is,” and is not intended to provide tax, legal or financial advice. Please consult your advisor with any questions.