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

• It basically means how much money is coming into the business and how much of it is going out of business and gives an idea of the amount of free cash flows the business has at the close of a particular period.
• It not only covers the cash flow changes on account of operational activities but also takes into consideration cash flow changes occurring on account of the finance and investment activities of the business.
• This formula provides detailed information relating to the amount of cash flows, whether positive or negative, of the business from each activity whether it pertains to operational activity such as revenue earned or expenses incurred for running the business, finance activity such as raising of funds or investing activity such as investment made in fixed assets or income earned by way of dividends and so on.

How to Calculate Net Cash Flow?

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

It can be calculated in 3 simple steps. They are as follows:

Step #1:

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

Operating activities reflect 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.

Step #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.

Step #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.

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:

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)

Example #2

Let us take a practical example to understand the concept in detail. Below is the unaudited cash flow statement 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.

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:

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

Step 2: Calculate the cash flow from investing activities:

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

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

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

• = $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:

• The amount of cash the business is generating or losing.
• The sources of cash infusion into the business;
• The utilization of the cash introduced into the business;
• Investments made by the company.
• Passive income generated through investments in other companies;
• Any internal restructuring is undertaken by the company.
• The amount of money return back to shareholders in the form of dividend or buyback;
• Idle cash lying with the company;
• The financial strength of the company;

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 –

• Formula of Net Cash Flow
• Cash Flow Plans Example
• Terminal Cash Flow Formula
• Incremental Cash Flow