What is Net Cash Flow?

Have you ever found yourself struggling for cash to meet your expenses at the end of the month? Is your spending always more than your cash on hand? Do you have trouble defining “financial flow”? If you responded yes to any of these questions, you’re not an expert in corporate cash flow.

How does it benefit your company? How can you boost cash flow?

What Exactly Is Net Cash Flow?

Before we get too far into all things cash flow, let’s define cash flow. Cash flow is the entire amount of money that enters and exits your firm.

A positive cash flow occurs when more money flows into your firm than out of it. You have a negative cash flow when more money flows out of your firm than comes in. (Negative cash flow is often known as being “in the red.”)

Profit and Revenue vs Cash Flow

It is critical to understand that cash flow is not the same as profit or revenue. Cash flow analyses all money that enters and exits your organization, not only money generated by typical business activities (payment). Profit is revenue minus costs and solely includes cash flow from activities.

This implies that a company might have a positive cash flow while being deemed unprofitable—for example, if the cash inflows come from sources other than activities, such as borrowing.

Why Is Cash Flow Important?

Now that you understand what cash flow is, it’s time to look at why it’s so crucial to your organization.

It keeps activities running smoothly. Your company does not come to a halt while you wait to get paid. Your company activities may grind to a standstill if you do not have enough cash to pay your costs. Understanding cash flow enables you to operate your organization in a manner that balances cash in vs cash out, allowing you to keep operations moving forward.

It contributes to your company plan. Understanding cash flow may help you make more strategic company choices.

As an example, suppose you need to purchase new office equipment. Calculating your company’s cash flow may help you make the best choice about when to acquire the equipment and will help you avoid a financial deficit.

It aids in future planning. Examining your cash flow statistics may help you better prepare for your firm’s future. Consider the following scenario: You run an artisanal ice cream parlor, and your business does significantly better in the summer than in the winter. Understanding your cash flow will assist you in setting aside enough funds to meet your running expenditures during the slower seasons.

Three Types of Cash Flow

Cash flow is influenced by three aspects of your business: operations, finance, and investments.

1. Cash Flow From Business Activities

Your operational cash flow is the money that comes in and goes out of your firm due to typical business operations.

Inflow illustration: money collected from your customers

Outflow illustration: rent, utilities, travel, mobile phone, and other charges

2. Financial Activities’ Cash Flow

Financing operations are any money between your company and its owners or creditors.

Inflow illustration: funds received from a bank loan

Monthly loan repayments are one example of an outflow.

3. Income From Investing Activities

Purchasing or selling an investment generates either negative or positive cash flow for your company. When calculating cash flow, buying or selling tangible assets such as buildings, land, and automobiles are considered investment activities.

Accounting Ideas

Businesses that use the accrual accounting technique include credit as part of their overall revenue. Customers’ outstanding balances and accounts receivable will show as line items on the company’s balance sheet. These do not qualify as currency since they are not completed transactions. It is worth remembering that completed credit card transactions are not considered “credit” but rather “cash.”

Balance statements are snapshots of a company’s financial position (often as of the final day of the fiscal year) in terms of assets and liabilities. A closing balance is an amount left in accounts after the fiscal year.

The income statement performs the same thing, but instead of presenting just one day of the year, it offers information over some time, whether an entire accounting period (the 12-month period for which an account compiles financial statements) for an annual report or a quarter for a quarterly report. Furthermore, an income statement often offers two or three prior years for comparison.

The cash flow statement shows how variations between the balance sheet and income statement affect cash and cash equivalents. A cash flow analysis separates operations, investments, and finance.

Models of Finance

Financial modeling provides a financial representation of a company or investment organization. Financial modeling is the technique through which a firm may anticipate future profits and predict how well future investments will perform.

The Internal Rate of Return is a familiar financial modeling (IRR) figure. This formula allows company owners to determine how lucrative any capital expenditures or investments will be. The computation equals the Net Present Worth (the value of money in today’s dollars) of any future assets to zero. Initiatives with higher IRR should be executed first and are likely to be a more lucrative investment among projects that need the same starting cash.

Cash Flow Financing

Many businesses look to outside activities to create cash flow. These operations, which include repaying investors, issuing new shares, and adding or amending loans, would come under the “financing activities” category in a company’s cash flow statements.

Income from financing operations is distinct from operational cash flow (also known as free cash flow), which refers to revenues earned by a company’s regular operating activities.

Conclusion

Every company, particularly new and small firms, relies on cash. Without money, the business cannot sustain itself. That is why knowing and controlling cash flow is critical to success. A cash flow statement is required to understand the money entering and exiting your firm. If you’re having trouble understanding financial statements, read our above guide.