Home Business Insights & Advice Why monitoring cash flow is so important for any business

Why monitoring cash flow is so important for any business

by John Saunders
28th Sep 22 3:25 pm

Cash flow is a measure of how much cash you have available in any given period, not how much you spend. There are three primary types of cash flows: operating, investing, and financing. A company’s cash flow statement is a document that details all of these flows.

Net cash flow measures the quantity of cash a business has left after accounting for all its expenses. There are several ways to measure net cash flow and some nuances depend on the type of entity. This article explains how to calculate net cash flow as well as the difference between net operating and net self-invested cash flows.

What is net cash flow?

Net cash flow is the amount of cash a business has to use after accounting for all of its expenses. The cash flow statement details all of the company’s cash flows and is used to help evaluate the company’s financial health. When calculating net cash flow, it’s important to remember that depreciation is an accounting expense and not a real-life expense.

How to calculate net cash flow for a company

The cash flow statement details the sources of cash for a company.

Net Cash Flow from Operations – This measures the amount of cash generated by a company’s core operations. It includes earnings after taxes, depreciation, amortization, and any changes in working capital.

Cash Outflows for Capital Expenditures – This is the amount of money a company spends on capital expenditures. It includes the purchase of new property, plant, and equipment.

Cash Inflows for Capital Expenditures – This is the source of cash a company uses to pay for capital expenditures. It includes the cash a company receives from issuing more equity, issuing more debt, or selling other assets.

How to calculate net operating cash flow for a company

Operating cash flow is the cash flow generated from a company’s core operations. It is also known as cash flow from operations and is usually abbreviated as CFO.

The calculation for net operating cash flow is as follows: Net Cash Flow from Operations – Cash Outflows for Capital Expenditures.

The main difference between CFO and net cash flow is that cash spent on capital expenditures is deducted from the net cash flow.

Net Cash Flow from Operations – Cash Outflows for Capital Expenditures

There are two ways to calculate net operating cash flow. The first way is by deducting cash spent on CAPEX from net cash flow. The other way is by deducting CAPEX from EBIT.

EBIT is earnings before interest, taxes, depreciation, and amortization. Both methods result in the same amount.

Example of how to calculate net cash flow

For example, if a company generates £100,000 in net cash flow from operations, has £10,000 in cash outflows for capital expenditures, and has £20,000 in earnings before interest, taxes, depreciation, and amortization, the net operating cash flow would be £100,000 – £10,000 + £20,000 = £90,000.

By deducting CAPEX from EBIT, the net operating cash flow is £100,000 – £10,000 + £20,000 – £10,000 = £90,000.

Different yypes of cash flows and their uses

Operating Cash Flow – This is the cash flow generated from a company’s core operations. It includes all revenue earned from the sale of goods and services less all the expenses related to running the business. It does not include any financing or investing activities. It’s important to note that depreciation is an accounting expense and not a real-life expense.

Cash Flow from Investing Activities – This measures the amount of cash used in investments like purchasing new businesses, building new plants, or buying new equipment. It includes the amount of money spent on buying and selling stocks and bonds as well as the proceeds from selling other investments such as real estate.

Cash Flow from Financing Activities – This measures the amount of cash generated from financing activities such as issuing new debt or equity. It also includes the amount of cash used to pay back debt as well as the amount of cash used to repurchase company stock.

Net self-invested cash flow for a company

This measures the amount of cash a company has left after accounting for all of its expenses minus the amount used to fund its own growth. It includes the amount of cash used to pay back debt as well as the amount of cash used to repurchase company stock.

The calculation for net self-invested cash flow is as follows: Net Cash Flow from Operations – Cash Outflows for Capital Expenditures – Cash Flow from Financing Activities.

Key takeaway

Cash flow is a measure of how much cash a business has left after accounting for all its expenses. There are three primary types of cash flows: operating, investing, and financing. A company’s cash flow statement is a document that details all of these flows.

However, perhaps the main reason for keeping an idea on the ‘real’ cash flow situation is to ensure that the business is not starting to fail, something that could lead to it being placed in Administration. For more details as to what happens in that instance please see https://www.antonybatty.com/company-administration/simplified-company-administration-process/

Leave a Comment

CLOSE AD

Sign up to our daily news alerts

[ms-form id=1]