Retained Cash Flow

Assessing and monitoring your business’s cash flow is an important aspect of financial planning and gauging the overall health and performance of your business. Using cash flow, you can pursue growth opportunities, pay back your creditors, and make dividend payments to investors.

But, in order to do any of these things, you need to have a good understanding of how much cash your business generates during a given period of time, and how much you have left over at the end of the period to propel your business forward.

Your retained cash flow is one measure that can help you gain a more accurate picture of your business’s financial health and growth prospects.

As you continue reading below, we will explain what retained cash flow is, how to calculate it, what it can tell you about your business, and provide you with some strategies to improve this metric.

What is Retained Cash Flow?

Retained cash flow (RCF) is the net change in cash and cash equivalents that your business had at the end of the period. 

It is a measure of the difference between your cash inflows and outflows throughout the month, quarter, or year.

This metric shows what’s left of your cash flow from operations after you have taken care of all obligations, including all debt payments, operational expenses, and dividend payouts.

So, it represents the amount of cash that the business has left over after all outflows have been accounted for–or the amount of cash flow that you retained from period to period.

How to Calculate Retained Cash Flow

There is a simple calculation to determine the retained cash flow of your business, which you can do by subtracting certain cash outflows from your cash inflows.

So, gather the cash flow statements from the last two periods, and find the difference between the operating cash flow values for the past two periods. Then, subtract the dividends paid during the two periods to get your retained cash flow.

Here is a breakdown of the retained cash flow equation, where T1 is the first period, and T2 is the following period:

Retained Cash Flow = (Operating CF in T1 – Dividends Paid in T1) – (Operating CF in T2 – Dividends Paid in T2)

You can use Finmark from BILL to calculate your retained cash flow directly from your cash flow statement. Finmark allows you to use the most up-to-date financial information so you can get a real-time view of your financial positioning at any point.

Retained Cash Flow Example

To illustrate what retained cash flow looks like in practice, let’s take a look at Company XYZ, which had operating cash flows of $11 million for 2021, and paid out dividends during the period of $2 million.

In 2022, the company generated $12.5 million in operating cash flows and paid out $5 million in dividends.

To find their retained cash flow, we’ll make the following calculations:

Retained cash flow = (11,000,000 – 2,000,000) – (12,500,000 – 5,000,000) 

          = (9,000,000) – (7,500,000)

          = (1,500,000)

In this example, the company had a retained cash flow value of $1.5 million between 2021-22. So, the company can use this value to determine which projects or ventures they could invest in to generate future growth.

Why Should Businesses Monitor Their Retained Cash Flow?

Analyzing your retained cash flow can tell you a lot about the efficiency of your operations, and reveal whether you are self-sustaining or require external financing to stay in business and cover all of your obligations.

If you have a positive retained cash flow, this is a good indicator of your financial health. It shows that you have dry powder to deploy and pursue growth initiatives, expansion efforts, and other opportunities.

If you notice that your retained cash flow is negative, or is minimal, it could indicate that you have completely depleted all your cash resources over the period to support operations.

This could signal a further cash flow shortage in the coming period, which could limit your ability to grow the business in the meantime.

Businesses in the earlier stages can expect a low, or even negative, retained cash flow while they’re investing heavily in the business with equipment purchases, hiring, and other pursuits.

But, if a negative retained cash flow persists, this could set off warning bells and be a sign that you need to make some operational changes to become more profitable and efficient with your resources.

What Can Businesses Do with Retained Cash Flow?

Retained cash flow provides you with capital that you can deploy for future growth opportunities or projects you’ve deemed worthwhile.

It is a cheaper form of financing than most other sources of capital, like taking on investor capital or additional debt, since it comes from your own operations.

All in all, companies typically want to boost value for shareholders, which becomes easier to do when you’re generating positive retained cash flow.

Using this cash, you can make share buybacks or reinvest in growth opportunities that help you generate more profit and boost your investors’ holdings.

This might include:

• Expanding your product lines
• Entering a new geography
• Purchasing new machinery
• Investing more into your sales and marketing efforts

Some companies may even decide to stockpile their retained cash flow for future opportunities if they are not confident in any of their current prospects, and would rather build up a financial cushion for themselves.

You will need to deliberate and analyze the opportunities internally to determine which would be the best use of your retained cash flow and would result in the best outcome for all stakeholders in the company.

In other words, the best use of retained cash flow will vary from business to business and depend on the unique factors impacting your operations like the industry you’re in, the competition in the space, the state of the overall economy, and other considerations.

Strategies to Improve Retained Cash Flow

Improving retained cash flow will provide your business with more stability and resources to pursue growth opportunities.

The various factors that determine what your retained cash flow is mean you have a number of levers that you can adjust to help improve this metric, like the following.

• Increase revenue: Invest in your sales and marketing efforts to boost new customer acquisition and retention of existing customers; explore new markets or product lines that could help you diversify your revenues; review your pricing strategy, and increase costs where possible to raise revenues and improve profitability.
• Cost management: Find areas where operational costs can be slimmed down, and try to negotiate better terms with suppliers where applicable to improve profit margins.
• Accounts receivable management: Ensure the invoicing process is organized for efficiency, and that customers receive invoices promptly; you can implement programs to provide credits if customers pay more quickly, improving your cash flows, and have effective collection programs to track down outstanding payments if needed.
• Tax planning: Investigate possible tax credits you could qualify for to minimize your tax liability; work with an expert to ensure your investments are set up in a tax-advantageous manner.

These are just some of the strategies that you can use to improve your retained cash flow.

Again, each company has unique circumstances that will make some of these options more appealing or feasible than others, which will require some internal assessment to determine the best course of action.

Calculate Your RCP with Finmark

Generating a positive retained cash flow can provide you with the capital you need to self-fund expansion efforts, new product lines, and other initiatives that will grow the business.

When you want to get a better idea of what your retained cash flow is and analyze areas for improvement, you can use Finmark to quickly calculate this metric from your cash flow statement.

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