The Definitive Guide to Understanding and Calculating Net Cash Flow

Calculating net cash flow can seem like an intimidating task, but it’s essential for business owners to understand this key financial metric when assessing their company’s true runway, potential for growth, and importantly, its viability to investors. In this guide, we simplify the complexities of net cash flow and show you how to practically analyse your unique financial situation.

What is net cash flow?

In its simplest form, net cash flow indicates whether a business has gained or lost amounts of cash over a specific period, usually a month, quarter, or year. It's calculated by taking your total cash inflows and subtracting total outflows of cash, including any investments and financing.

A positive net cash flow (or more income than expenses) suggests strong liquidity and the ability to take advantage of growth opportunities. But don't panic if the numbers fall in the red! A negative cash flow simply means expenses exceed income for that time period — and there may be strategic reasons behind a temporary shortfall.

For example, investing in new equipment or upgrades may lower your cash balance temporarily but pay off in the long run. The benefits of improving operations, even when acquiring another company, can take time to materialise in the numbers, and it’s important to consider both the long-term and short-term effects of how your cash is being allocated.

Positive and negative contributing cash flow factors

Let’s take a quick look at some typical business activities that can influence your net cash flow statement: 

Positive cash flow factors

• Increased sales revenue and profit margins
• Cost reductions or debt repayment freeing up capital
• Accessing new financing lines or loans
• Customer acquisition leading to revenue growth
• Successful product launches/feature additions boosting uptake
• Improved pricing, promotions or sales conversions
• Decreased customer churn/increased retention rates

Negative cash flow factors

• Increased sales and marketing investment in customer acquisition activities
• Higher than expected operating costs or supplier prices
• Lower than projected sales in a period due to macro factors
• One-off restructuring or redundancy costs
• Purchasing long-term assets like new equipment, property, or vehicles
• Incurring merger and acquisition costs from integrating another business
• Debt repayments on existing loans or credit facilities
• Legal fees related to disputes/compliance issues

Focus on reviewing all your financials together regularly to get the full picture of your net cash flow. Short term dips don't necessarily spell trouble within the right context. Look at trends over multiple periods, understand why cash is flowing the way it is and the balance between operational income, investment decisions and financing arrangements.

How to calculate net cash flow (with formula)

Now that you know what activities can influence net cash flow, let's dive into the actual calculation. As we mentioned before, net cash flow (NCF) can be calculated in its simplest form by using the formula:

NCF = Total Cash Inflow – Total Cash Outflow

To transparently breakdown your operational profits and losses, investments in the business, and understand how financing activities affect liquidity, the formula below gives clearer insight into the sources of positive or negative cash movements each period. 

NCF = Cash Flow from Operations + Cash Flow from Investing Activities + Cash Flow from Financing Activities

‍This expanded framework is necessary when it comes to strategic planning and performance management. Let’s take a look at how to put it to use by evaluating the quarterly net cash flow of HypoTaskHub, a fictional SaaS-based project management tool:

Example of a quarterly net cash flow calculation statement

‍

Analysing net cash flow trends

By reviewing their net cash flow statements over several periods, founders and management can gain valuable insights into the company. Let's continue using HypoTaskHub as an example and take a look at how to analyse NCF trends:

Early Periods:

NCF was flat as funding was reinvested into product development and customer acquisition.

Period 1:

NCF doubled in the first year as new features increased subscriptions. However, heavy marketing costs caused temporary dips until retention improved.

Period 2:

After a large client rolled out usage, NCF grew. But over-hiring strained costs and led to a quarterly loss.

Period 3:

Optimisations boosted renewals and referrals, but developing a mobile app depleted NCF for 6 months.

Period 4:

NCF surged after paid upgrades, expanded usage and climbing deferred revenue.

Through analysing these trends, HypoTaskHub would be in a better position to:

• Identify profitable/unprofitable areas to optimise cash flows
• Determine if investments are generating adequate returns
• Forecast financing needs in advance
• Improve performance management and accountability
• Demonstrate the company's viability and evolution to potential backers

‍

Why net cash flow matters to investors

Investors want clear visibility into how a business currently generates cash and its ability to produce sustainable returns over the long run. A positive, growing NCF profile demonstrates true profitability and viability beyond accounting metrics alone. 

Founders must be able to articulate in-depth insights into drivers of historical cash flows as well as strategic plans and initiatives designed to enhance generation of cash through scaling operations. Routine analysis of trends paired with sensitised projections underpins a compelling case for growth.

‍

Access alternative funding with Kashcade

For startups looking to scale without dilution, Kashcade provides non-dilutive R&D tax incentive loans to Australian businesses. Founders can access funds within 48 hours to support their growth, without worrying about monthly repayments that negatively impacts their cash flows.

Estimate your funding potential quickly using Kashcade's online funding calculator or get in touch with us to learn more about your funding options and whether it’s the right fit for your business.