Net Cash Flow

What is Net Cash Flow?

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

Explanation

Net-Cash-Flow

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For eg:
Source: Net Cash Flow (wallstreetmojo.com)

How to Calculate Net Cash Flow?

Net Cash Flow = Cash Inflow – Cash outflow

Alternatively, it can also be calculated by applying the below formula, which provides a detailed picture of cash flow activities.

Net cash flow can be calculated in 3 simple steps. They are as follows:

  1. First and foremost, calculate the cash flow from operating activities.


    Operating activities reflectOperating Activities ReflectOperating 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 the cash flow moves towards the core area of operation of the company and include cash flows from income, and operations of the company, depreciation, taxes, changes in working capital.

  2. Now, move on to calculating cash flow from investing activities.


    Investing activities consider any change in cash movement from an investment perspective, say purchase or sale of fixed assets, investments made in other companies, and similar aspects.

  3. Lastly, calculate the change in cash flow from financing activities.


    Financing activities relates to the cash flow generated or lost on account of any finance-related activity such as an increase or decrease in borrowings or debt, buyback of shares, dividend payments, etc.

    Voila…!!! You now have all the required numbers. Simply add all the three numbers arrived i.e., Step 1, Step 2, and Step 3, and the resultant answer gives you the Net Cash Flow.

Examples

Let us understand with some examples.

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

Example #1

First, let’s take a simple example to understand the concept.

Jonath has been operating his proprietary concern for a few years now. He wishes to calculate net cash flow for the current year. His concern has an opening cash balance amounting to $1 million. His concern earned $0.78 million from operating activities, $-0.53 million from investing activities, and $0.82 million from financing activities.

Solution:

Net Cash Flow Example 1

Thus, Net cash Flow of Jonath’s proprietary concern is $1.07 million.

To arrive at closing cash balance, adjust the net cash flow with the opening cash balance. Thus, closing cash balance will be @2.07 million (i.e., $1 million + $1.07 million)

Net Cash Flow Example 1-1

Example #2

Let us take a practical example to understand the concept in detail. Below is the unaudited cash flow statementCash Flow StatementStatement of Cash flow is a statement in financial accounting which reports the details about the cash generated and the cash outflow of the company during a particular accounting period under consideration from the different activities i.e., operating activities, investing activities and financing activities.read more of The Walt Disney Company for the period ended in September 2019. Calculate the Net cash Flow for the Walt Disney Company based on given information.

Net Cash Flow Example 2

Solution:

In order to calculate Net Cash flow for The Walt Disney Company, we first need to segregate the information provided under the following 3 categories:

  1. Transactions covered under operational activities;
  2. Transactions covered under Investing activities; and
  3. Transactions covered under financing activities.

Step 1: Calculate the cash flow from operating activities:

Operations Example 2-1

Therefore, Cash flow from operating activities is $ 6,606 million

Step 2: Calculate the cash flow from investing activities:

Investing Activities Example 2-2

Therefore, Cash flow from operating activities is $ -4,118 million

Step 3: Calculate the change in cash flow from financing activities

Financing Activities Example 2-3

Therefore, Cash flow from operating activities is $ -1,188 million

Net Cash Flow Example 2-4
  • = $6606 + (-$4118) + (-$1188)
  • = $1300

The Net Cash Flow for the Walt Disney Company for the given period is $1,300 million.

Importance

Net Cash Flow has its own importance when it comes to an understanding and analyzing the cash flows of a business. It provides useful information, such as stated below:

Difference between Net Cash Flow and Net Income

  • Many times, people may get confused and use the terms Net Cash Flow and Net Income interchangeably. However, it is essential to note that both these terms are very different from each other.
  • As already discussed above, Net Cash Flow refers to the net cash impact, whether generated or lost, from various business activities such as operational activity, investment activity, and finance activity, taken altogether for a given period.
  • Whereas, Net Income refers to the Net profit earned by the business after the reduction of all expenses for the given period.Net Income is equal to Revenue earned reduced by all expenses incurred in order to earn the revenue.
  • Net Income will offer information only with respect to the profitability of the organization for the given period. In contrast, Net Cash flow gives an overall picture of cash flow movement, including from, how and where money has been sourced into business to how and where it has been spent.

Conclusion

To sum up, everything discussed above in one-line, Net Cash Flow is the difference between how much cash the company generates or loses viz a viz how much cash the company spends or incurs on account of engaging in various activities involving management of operations, taking care of investments and handling the finances.

Recommended Articles

This has been a guide to what is net cash flow and its definition. Here we discuss formula, example, and how to calculate net cash flow along with its importance. You may learn more about financing from the following articles –

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