Net Cash Flow Formula

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.

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 activitiesFinancing ActivitiesThe various transactions that involve the movement of funds between the company and its investors, owners, or creditors in order to achieve long-term growth are referred to as financing activities. Such activities can be analyzed in the financial section of the company's cash flow statement.read more.

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 FlowNet Cash FlowNet cash flow refers to the difference in cash inflows and outflows, generated or lost over the period, from all business activities combined. In simple terms, it is the net impact of the organization's cash inflow and cash outflow for a particular period, say monthly, quarterly, annually, as may be required.read more 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 flowCash FlowCash Flow is the amount of cash or cash equivalent generated & consumed by a Company over a given period. It proves to be a prerequisite for analyzing the business’s strength, profitability, & scope for betterment. read more 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 informationFinancial InformationFinancial Information refers to the summarized data of monetary transactions that is helpful to investors in understanding company’s profitability, their assets, and growth prospects. Financial Data about individuals like past Months Bank Statement, Tax return receipts helps banks to understand customer’s credit quality, repayment capacity etc.read more. 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 –

Calculation of total cash outflows will be –

Calculation of net cash flow can be done as follows:

Net Cash Flows = 55,000 – 23,000

The Net Cash FlowNet Cash FlowNet cash flow refers to the difference in cash inflows and outflows, generated or lost over the period, from all business activities combined. In simple terms, it is the net impact of the organization's cash inflow and cash outflow for a particular period, say monthly, quarterly, annually, as may be required.read more will be –

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 statementPreparing The Cash Flow StatementA Statement of Cash Flow is an accounting document that tracks the incoming and outgoing cash and cash equivalents from a business.read more 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 OperatingActivities Which Are OperatingOperating activities generate the majority of the company's cash flows since they are directly linked to the company's core business activities such as sales, distribution, and production.read more, 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 stockBuy-back Its StockShare buyback refers to the repurchase of the company’s own outstanding shares from the open market using the accumulated funds of the company to decrease the outstanding shares in the company’s balance sheet. This is done either to increase the value of the existing shares or to prevent various shareholders from controlling the company.read more, 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 shareEarnings Per ShareEarnings Per Share (EPS) is a key financial metric that investors use to assess a company's performance and profitability before investing. It is calculated by dividing total earnings or total net income by the total number of outstanding shares. The higher the earnings per share (EPS), the more profitable the company is.read more. 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 –