What is net cash flow
Net cash flow is an economic indicator of the solvency and financial well-being of the organization. The result of the calculation gives management, creditors and investors a clear understanding of the profitability of further financial investments.
In simple terms, net cash flow is the difference between the inflow and outflow of a company’s finances.
Illustrative examples of the calculation of this indicator are carried out by two methods: direct and indirect. The direct method is the simplest. The indirect method of calculating net cash flow has the advantage of obtaining additional information about the economic component of the firm.
Cash flow is an economic term that is an indicator of the movement of all the finances of an enterprise. Cash flow takes into account both positive and negative dynamics.
Net cash flow is the difference between the inflow and outflow of cash in a particular period.
The concept of cash flow
Often, when talking about the movement of money in a company, the English term Cash Flow (CH) is used. This wording is convenient when calculating cash flow using a formula. Financial flow analysis allows you to see sectors that require increased capital and vice versa.
Types of cash flows
Modern economics classifies financial cash flows depending on the sources of cash flow.
Cash flow from investment activities and the rejection of unnecessary purchases.
Capital gains from long-term assets and loans to other organizations.
Increasing cash flow through interest from dividends and from own sales.
Cash flow analysis
The purpose of a comprehensive cash flow analysis is to optimize financial contributions and assess the economic stability of the company. Cash flow analysis is carried out by drawing up a cash flow statement. The report is created for three areas of the organization. These areas are the structure of cash flow, including net:
current or operating activities (sale and purchase of goods, provision and use of services, payment of salaries, taxes and debt obligations);
investment activity (sale and purchase of securities, provision of loans);
financial activity (cash flow from the company’s activities).
Analysis of cash flow structures is important for all participants in the financial activities of the enterprise. Conclusions based on the analysis make it possible to understand the capabilities and needs of the organization, to identify weak and strong positions.
Estimated cash flows
Estimation of the cash flow is necessary to form an idea of the net cash flow of the enterprise. To assess financial movements, the division of flows into positive and negative is used.
Positive flow is capital gains from sales, interest, etc.
Negative represents the outflow of money associated with planned expenses and mandatory payments.
What does net cash flow mean
Net cash flow is defined as the main indicator of the financial well-being of the enterprise. In simple terms, net cash flow is the difference between positive and negative cash flow over a certain period of time.
Lenders and investors take net cash flow into account when deciding to invest in a business. The higher this indicator, the more attractive the project.
Net cash flow calculation example
To calculate the net cash flow in practice, two methods are used. The direct method is a calculation based on accounting data. The basis of the calculation is the organization’s revenue.
The formula for calculating net cash flow under the direct method is the sum of all positive cash inflows, from which negative flows are subtracted. This example of calculating the net cash flow does not allow you to track changes in the assets and liabilities of the enterprise.
The indirect method allows you to see the financial result and net profit of the enterprise. The formula for calculating net cash flow using the indirect method includes several additional criteria:
dynamics of assets and liabilities;
amortization of financial movements.
First, net income, depreciation and reduction (or increase) in debt on loans are summed up. The decrease (or increase) on receivables and the amount on the balance of goods is deducted from the resulting value. This calculation method is considered the most popular and informative.