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Updated January 10, 2021

What Is Net Cash Flow? 

Net cash flow is the difference between a company’s cash inflows and outflows within a given time period. After paying for all operating costs and debt payments, a company has a positive cash flow when it has excess cash. If a company is paying more for expenses than it earns, it has a negative cash flow.

Is Net Cash Flow the Same as Profit? 

While net cash flow and profit are commonly mistaken for each other, they’re very different parameters for measuring performance in business (though they’re equally important). Net cash flow shows the amount of cash flowing in and out of a business at a given point in time. Profit, however, measures what is left over after expenses are subtracted from revenue. 

Even though they’re different indicators of fiscal health, they are related. However, just because a business is profitable doesn’t mean that it has a positive cash flow to easily cover its expenses (or vice versa). For example, revenue may be earned by performing a service for a client, but the cash may not be paid until some time later. Until the cash is paid, the company shows revenue, but not cash. 

Net Cash Flow vs. Free Cash Flow

Net cash flow and free cash flow are different ways of measuring whether assets can be easily turned into cash. These metrics help management determine where cash is being acquired and spent in normal operations and enable investors to make more informed decisions.

Net cash flow illustrates the amount of money being transferred in and out of a business’s accounts. In contrast, free cash flow is the amount of cash left over after all operating expenses, and capital expenditures are taken care of.

Net cash flow illustrates whether a company’s liquid assets are increasing or decreasing. Positive net cash flow indicates that a company can reinvest in operations, pay expenses, return cash to shareholders, and pay off debt. 

Free cash flow reports whether a company is strategically acquiring and utilizing its available cash. Having free cash flow indicates that a company can pay dividends and engage in share buybacks with its shareholders. While this may seem like a positive realization at first, upon closer inspection, it may be that the free cash flow has been obtained through increased debt.

Why Is Net Cash Flow Important? 

Net cash flow is arguably one of the most critical metrics for a business. It helps a company to expand while also ensuring day-to-day operations run smoothly. Companies can use cash flow for product development, marketing efforts, technology investments, buying back stock or issuing dividends, reducing debt, or improving employee benefits.

Business executives use all of this data to make decisions about the future of their company. Over time, a company that does not have a positive net cash flow will fail.

Net cash flow can be broken down into three components:

How Is Net Cash Flow Calculated? 

There are several methods to calculate net cash flow using a company’s financial transactions. 
Where to Find Net Cash Flow 
When using a balance sheet, the cash balance difference between two consecutive time periods equals the net cash flow.

The cash flow statement compiles all of the income and expenses for a specified period and shows the resulting net cash flow from operating, investing, and financing transactions. Using this information, the inflow and outflow of cash can help to calculate net cash flow.

The Net Cash Flow Formula 

The net cash flow formula calculates cash inflows minus cash outflows to produce the net cash flow.

Net cash flow = cash inflows - cash outflows

It can also be expressed as the sum of cash from operating activities (CFO), investing activities (CFI), and financing activities (CFF).

Net Cash Flow = CFO+CFI+CFF

Example of Calculating Net Cash Flow 

For example, if Company ABC had $250,000 cash inflows and $150,000 cash outflows during the first quarter of their fiscal year, their net cash flow would be equal to $100,000. This would be considered positive cash flow. If they reproduce this same result throughout all four quarters of the year, they would have a $400,000 annual net cash flow.

 

Net cash flow (Quarter 1) = $250,000 - $150,000
Net cash flow (Quarter 1) = $100,000

Net cash flow (Fiscal Year) = $100,000 x 4
Net cash flow (Fiscal Year) = $400,000

Can Net Cash Flow Be Negative? 

Net cash flow can be negative if a company spends more than it earns during a period of time. It may result in pulling funds from savings, investments, and financing to cover costs. 

For example, if Company ABC has $10,000 in expenses this month, but customers only pay $5,000 worth of invoices, there would be $5,000 in negative cash flow.

While negative cash flow can indicate a company is losing cash, it’s not necessarily an indicator that it is performing poorly. The income and expenses may simply not line up, but could very well end up with a net profit at the end of the fiscal year. Additionally, the company may have just paid off a large amount of debt or invested a significant portion of its reserves in new equipment.

Example(s) of Net Cash Flow 

Calculating net cash flow is an essential factor in understanding the financial health of a company. It allows senior-level managers to make decisions about operations moving forward.

Example #1

Company ABC is an established online retail company. The owner has contracted the services of an accountant to report on the fiscal health at the end of the year. The accountant gathered that the firm earned $10 million from operating activities, $500,000 from financing activities, and spent $3 million on investing activities.

Based on this information, the accountant utilized the following formula to calculate the net cash flow.

Net cash flow = $10 million - $3 million + $500,000
Net cash flow = $7.5 million

The net cash flow for Company ABC is $7.5 million.

Example #2

Mr. Smith is the owner of Company XYZ and is looking to clean up his book of accounts to apply for a loan from his local bank for future expenditures. After analyzing income and expenses, he has narrowed the cash flow down to the following entries. He would like to use this data to calculate their net cash flow.

The cash inflows for Company XYZ total $50 million, and the cash outflows for Company XYZ total $21 million. Thus, Mr. Smith can calculate the following equation:

Net cash flow = $50 million - $21 million
Net cash flow = $29 million

Example #3

The senior-level managers at Company ABC are preparing their cash flow statement to understand which business activities bring positive and negative cash flows. They have compiled the following data and would like to figure out how to find net cash flow from operating activities, investing activities, and financing activities.

Operating activities = $2 million - $15,000 - $1 million
Operating activities = $985,000

Investing activities = $60,000 - $95,000
Investing activities = -$35,000

Financing activities = $75,000 - $55,000
Financing activities = $20,000

For Company ABC, operating activities total $985,000, investing activities total -$35,000, and financing activities total $20,000.

Net cash flow = $985,000 - $35,000 + $20,000
Net cash flow = $970,000

Company ABC has a positive net cash flow of $970,000. 

This means that the company earned enough cash from operations to support investing and financing activities. If Company ABC had a negative net cash flow, this could indicate that borrowing was supporting operations. It would not be a sustainable way to continue financing the company.

 

 

Ask an Expert about Net Cash Flow
At InvestingAnswers, all of our content is verified for accuracy by Rachel Siegel, CFA and our team of certified financial experts. We pride ourselves on quality, research, and transparency, and we value your feedback. Below you'll find answers to some of the most common reader questions about Net Cash Flow.

Can Cash Flow Equal Net Income? 

Cash flow and net income are different ways of tracking a business’s profitability, and therefore, cannot be the same. The most substantial difference is seen in the two calculations. 

Net income = revenue - expenses

Net cash flow = cash inflows - cash outflows

Net income tracks income and expenses on an accrual basis. This means that costs are recognized as they are accrued, and revenue is recognized as it is earned rather than when the cash flows in or out for each. 

Net income differs in that it doesn’t represent the amount of money going in or out of a business during a specific period.

For example, Company ABC earned $50,000 in total sales and received $25,000 in cash from customers during quarter one of the year. They also accrued $15,000 in expenses and paid $10,000 in cash for those expenses. Here is the breakdown of net income and net cash flow:

Net income = $50,000 - $15,000
Net income = $35,000

Net cash flow = $25,000 - $10,000
Net cash flow = $15,000

While the two metrics are both aimed to help businesses understand their fiscal health, they measure different factors and will not equal each other.

Are Net Cash Flow and Depreciation Related? 

Depreciation refers to how business assets (e.g. machinery, computers, office equipment) are used up over time. These assets’ value will eventually drop to zero when they are no longer usable. Depreciation allows a company to expense such assets in each year that they are used, rather than simply showing the entire cost of the assets in the year that it is purchased, spreading the cost of these assets over their lifespans.

While depreciation does not directly affect net cash flow, it is indirectly related. Depreciation is a tax-deductible expense and will reduce the amount of taxes or cash outflows that a business pays. This results in a higher cash balance on the company’s cash flow statement. However, because the original purchase causes a cash outflow, the positive impact of depreciation on current cash flow can essentially be voided.

Net Cash Flow vs. EBITDA

Earnings before interest, tax, depreciation, and amortization (EBITDA) is often used synonymously for cash flow from operations. It is another useful tool in calculating a company’s profitability, focusing on determining its ability to take on debt and keep up with competitors.

EBITDA can be calculated in two ways:

EBITDA = net profit + interest + taxes + depreciation + amortization

- Or -

EBITDA = operating income + depreciation + amortization

However, cash flow is a much more comprehensive view of a company’s financial wellbeing because EBITDA fails to include many types of expenses (and can make a company’s cash appear more liquid than it is).

Rachel Siegel, CFA
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Chartered Financial Analyst

Rachel Siegel, CFA is one of the nation's leading experts at ensuring the accuracy of financial and economic text.  Her prestigious background includes over 10 years of experience in creating professional financial certification exams and another 20 years of college-level teaching.

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