Calculate The Net Or Average Cash Flow
Calculating the net cash flow gives you key insight into where your business stands – if you have a negative cash flow or a positive cash flow. When you understand how much your business generates, you will be able to comprehend your financial viability both in the short and long term.
What Is Net Cash Flow?
Net cash flow (NCF) is a profitability metric that tells you the amount of cash that came in or went out of your business during a given period. If more money came in, the cash flow would be positive; if more money went out, the cash flow would be negative.
The net cash flow can be calculated by considering the three cash flow categories:
Capital generated and used for administrative expenses and receipts from customers.
Capital generated via debt agreements or cash issued to pay off debts/pay out dividends.
Capital generated through profitable investments or cash issued to make an investment/buy fixed assets.
The Net Cash Flow Formula
Net Cash Flow = Total Cash Inflows – Total Cash Outflows
Why Do You Need to Calculate the Net Cash Flow?
The NCF gives you and your potential investors insight into your company’s ability to survive and grow in the future. If your business is consistently able to generate a positive net cash flow, it may have a chance of succeeding. It opens up opportunities for you to invest in research and development, purchase new equipment, and hire more employees.
On the other hand, if your business generates a negative net cash flow month after month, it may encounter financial/operational issues and limit your business’s ability to invest back in the business.
The net cash flow helps you make decisions about the future, especially when calculating the payback period of a potential investment.
Benefits of Calculating the Net Cash Flow
By calculating net cash flow either for an isolated period of time or period over period, you will get the likelihood of your business continuing in the short-term and long-term. In this way, you get a bigger picture idea of cash flow trends over time.
Help you identify issues early on
The net cash flow helps you keep track of cash flow fluctuations and why it happens over time. In this context, you will be able to identify issues early on before they turn into bigger ones.
Gain the trust of potential investors
If you plan to raise capital via business loans or investors, your net cash flow metrics will help potential lenders and investors determine when they can expect repayment or return on their investment.
Get over your growing pains
When you calculate the net cash flow, you get an idea of how much capital is left on hand to continue business operations. If you are expanding quickly with profits but the lead time between purchasing raw materials and being paid is long, you will ultimately get short on cash. When the amount of cash invested is too low to meet day-to-day running expenses, you'll need a business loan on time to get over your growing pains. The net cash flow calculation will give you an estimate of the correct time to secure a business loan and save your business operations from suffering.
Move Forward with ScottValleyBank
Once you understand the importance of calculating the net cash flow, you have a better grasp of your business’s ability to generate liquid cash assets. ScottValleyBank will help you track the net cash flow by considering all the scenarios that can cause fluctuations in it. We’ll look at the bigger picture and consider the context aside from the actual metrics.