Net Cash Flow is the difference between the cash coming into a business and the cash going out of a business during a specific period of time and this is the net cash flow from 3 different areas.
The cash involved in the operation of the business including cash coming in from sales of services and/or products and cash going out from rent, wages, marketing and bills.
The cash involved in financing a business including outgoing cost of paying off debt, cash to shareholders and dividend payouts plus money incoming from borrowing or the issuing of equity
The cash involved in Investment activities including money incoming from investments or sale of an asset and money paid out for investments including the purchase of equipment or assets.
Net cash flow is calculated by subtracting outgoing cash flow from incoming cash flow over a specific period of time.
Why is understanding net cash flow important?
It is essential to have cash in a business to ensure its day to day running costs are covered, if you cannot meet your bills you could quickly go out of business even if over a longer period of time your business is profitable.
Keeping a track on cash flow, whether it is positive or negative, over a particular period of time is very important in understanding how your business is managing and will manage in the future. It enables you to follow the flow of cash and identify periods when incoming/outgoing costs are higher or lower. This could be crucial when planning, in particular when decisions will involve cash coming into or leaving the business. Making sure you are not short of cash in your business for any period of time could be the key to your success.
Cash Flow is also important information for lenders and potential investors to see. A positive cash flow is important as they will be concerned about receiving repayment of a loan or a return on their investment.
What are the limitations of net cash flow?
- The cash flow figure alone does not show the profitability of a company, just the cash available in a specific period
- Positive cash flow from a loan that needs repaying may not be positive for the business and negative cash flow from a investment that could reap future rewards may not be negative therefore care is needed to see the bigger picture
- The net cash flow figure is historical and therefore unable to be used to forecast future cash flows
- This can make it hard to assess a company’s liabilities accurately from this figure alone
- Net cash flow should be taken as only one part of an overall picture when assessing the health of a business
As your lender, we can release up to 90% of your invoices within 24 hours. On payment of the invoice from your customers, we will then release the final amount minus any fees and charges. There are different types of invoice financing options available to businesses depending on the situation and the level of control they require in collecting unpaid invoices.
We are an invoice financing company who offer a solution whereby payments are collected on your behalf managed by our team of expert credit controllers so you can focus on running your business. Our Confidential Invoice Discounting solution is offered to businesses who want to maintain their own credit control processes, therefore this remains strictly confidential so your customers are unaware of our involvement.