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Net Cash Flow Formula

Updated on July 9, 2024
Article byWallstreetmojo Team
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Net Cash Flow Formula?

The Net Cash Flow Formula (NCF) refers to the mathematical equation that helps calculate the cash flow of a company during a period. It is denoted as the total net cash outflow subtracted from the total cash inflow. The figure obtained allows businesses to check how balanced the inflow and outflow of cash of the business is, thereby helping them to assess their performance.

Net-Cash-Flow-Formula

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The net cash flow formula is figured out after adding the net cash flow from operating activities, net cash flow from investing activities, and net cash flow from financing activities. The same can also be calculated by subtracting the company’s cash payments from the cash receipts.

Net Cash Flow Formula Explained

The Net Cash Flow formula is a very useful equation as it allows the firm or the company to know the amount of cash generated, whether it’s positive or negative. Also, the firm can bifurcate the same into three major activities.

Net Cash Flow = Total Cash Inflows – Total Cash Outflows

The firm can bifurcate the same into three major activities.

  • Operating activity is the key as the firm generates its revenue from operating activities. Healthy cash flow from operating activity is a good sign that business is performing well.
  • The second activity is the cash flow from investing activity. This would in most cases be negative as the firm invests their major cash flow either in plant and machinery or in another product as an investment. The cash inflow here would be dividends received etc.
  • The last activity is the cash flow from financing activity; in this, the firm would know how it has raised its funds, whether internally, i.e., by issuing shares or by raising externally that is, by a loan.

When the NCF figure is positive, the business reflects making money and positive growth. On the contrary, if the figure obtained is negative, it indicates that the business is losing money. Businesses can have a look at the NCF from time to time for comparison and find out which strategies and tactics are working for them and what are the things to be avoided. In short, the calculation not only helps businesses assess their performance but also have improved strategies planned and implemented for growth.

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Examples

Let us consider the following examples to understand how to use the formula for calculating the net cash flow:

You can download this Net Cash Flow Formula Excel Template here – Net Cash Flow Formula Excel Template

Example #1

Company XYZ has been operating in the manufacturing business for ages. The accountant of company WYZ wants to calculate net cash flow for the year ended. The company reported $34 million as the opening cash balance. It was further reported that the firm earned $100 million from operating activities, $-50 million from investing activities, and $30 million from financing activities.

Based on the above information, you must calculate the firm’s closing cash balance.

Solution:

Use the below data given for the calculation of net cash flow.

  • Net Cash Flow from Operating Activities: 100000000
  • Net Cash Flow from Investing Activities: -50000000
  • Net Cash Flow from Financing Activities: 30000000

Calculation of net cash flow can be done as follows:

Example 1.1

This is a simple example of calculating cash flow. We can use the above equation to calculate the same.

Net Cash Flow = $100 million – $50 million + $30 million

Net Cash Flow will be –

Net Cash Flow Formula Example 1.2

Net Cash Flow = $80 million

The Net cash flow for the firm is $80 million.

The opening cash balance of the firm is $34 million, and if we add net cash flow, which is $80 million, we will get the closing balance as $114 million.

Example #2

Mr. M is the sole proprietor of M & M Associates. The firm’s turnover is less than $2.5 million, and hence as per tax rules, they are not required to maintain books of accounts and can directly show 50% as net profit. However, Mr. M wants to know how much cash flow occurred during the year as he wants to borrow a loan from a bank for future requirements.

Below is the summary which the accountant prepared for loan appraisal.

Example 2

The firm is looking to have 80,000 cash in hand, which will be met by loan and cash in hand. First, you must calculate the amount of loan that M&M Associates will require.

Solution:

We are given a summary of financial information. To calculate the loan amount, we will first calculate the available cash in hand, and for the same, we need to calculate the net cash flow.

Calculation of total cash inflows will be –

Net Cash Flow Formula Example 2.1

Calculation of total cash outflows will be –

Net Cash Flow Formula Example 2.2

Calculation of net cash flow can be done as follows:

Net Cash Flow Formula Example 2.3

Net Cash Flows = 55,000 – 23,000

The Net Cash Flow will be –

Net Cash Flow Formula Example 2.4

Net Cash Flow = 32000

Hence, the loan amount required will be 80,000 – 32000, which is 48,000.

Example #3

Dynamic Label Inc. has been preparing the cash flow statement to know which activity gave them positive cash flow and which activity gave them negative cash flow. They have gathered the below information from the cash account, and now they want to segregate the cash flow into operating, financing, and investing activities.

ParticularsAmount
Cash Flow From Debtors157856
Cash Flow from Creditors-123445
Income Tax Paid-9877
Sold Plant & Machinery53278
Loans Repaid-56778
Buildings Purchased-75000

You are required to calculate the net cash flow using a direct method.

Solution:

We will first categorize the sources and applications of funds in the three activities which are Operating, financing, and investing.

Example 3.1

Now we will add the cash flow and deduct the cash outflow, and arrive at the respective cash flow from that activity below:

Net Cash Flow Formula Example 3.2.0

Net Cash Flow = -21722 + 22213 + 24534

Net Cash Flow will be –

Example 3.3

Net Cash Flow = 25025

Net Cash Flow Calculator

You can use this net cash flow calculator.

Total Cash Inflows
Total Cash Outflows
Net Cash Flow
 

Net Cash Flow = Total Cash Inflows Total Cash Outflows
0 0 = 0

Relevance and Uses

Net cash flow, as mentioned earlier, is an important concept and is the fuel that shall aid firms in developing new products, buy-back its stock, expanding plans, paying dividends to shareholders, or repaying their loans or debt. It is what allows the firms to perform their daily routine business smoothly. This is why some people value the net cash flow even more than any other finance measure, including EPS earnings per share. The big drivers of the net cash flows are Revenues or sales and expenses.

This has been a guide to what is Net Cash Flow Formula. Here, explain the concept with examples, relevance and uses, and a downloadable excel template. You can learn more about financing from the following articles –