What is net cash flow? Its meaning, and how to work it out

Published • 22/05/2024 | Updated • 22/05/2024


What is net cash flow? Its meaning, and how to work it out

Published • 22/05/2024 | Updated • 22/05/2024


There are a number of accounting metrics that can help you assess the financial health of your business, giving you a sense of its profitability, liquidity, efficiency, and more. Net cash flow is one of the most important in this mix.

Knowing how to work out net cash flow can help you spot financial issues early, so you can fix them before they become big problems. Specifically, it tells you:

  • Whether your cash flow can cover your bills and operating costs.

  • How smoothly your business is running.

  • If you have a buffer for unexpected expenses and new opportunities.

  • Whether your business model is on the right track.

  • If you need to adjust your cash flow strategy.

In this guide, you'll find out more about net cash flow and why it matters. We’ll dig into net cash flow meaning, talk about how to calculate net cash flow, and discuss practical approaches to how to improve cash flow, from managing expenses more effectively to boosting revenue.

Whether you're thinking about how to start a business or have been in the game for a while, this guide offers insights to help you understand and manage net cash flow better.

What is net cash flow?

Net cash flow is basically the difference between what your business brings in and pays out over a certain period

It considers various sources of revenue like sales, services, and other income streams, and subtracts costs like salaries, rent, utilities, and loan repayments. Net cash flow therefore gives you a snapshot of whether your business is earning more than its spending.

Generally, the cash flows in your business come from three main areas:

  • Operating activities

  • Financing activities

  • Investing activities

Before we dive into how to work out net cash flow, let’s look at these in more detail.

Cash from operating activities

Net cash flow from operating activities measures the cash your business rakes in from its core activities. This includes income from selling products or services (making robust pricing strategies a must), as well as expenses for day-to-day activities like buying stock, paying employees, and covering utility bills.

The “operating activities” category also encompasses the smaller costs that keep the business running, like office supplies or coffee for staff meetings. Keeping track of these small business expenses is vital for understanding where every penny is spent or earned and if you have enough cash to keep your business going.

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Cash from investing activities

Cash flow from investing activities is the cash your business uses to grow and evolve. This includes cash spent on new equipment or property, as well as income from selling assets you no longer need.

If, say, you’re optimising how your business operates by installing a cutting-edge point-of-sale system like POS Lite,  or perhaps upgrading your small business cyber security software, these outlays would be included under “investing activities”.

If, on the flip side, you sell machinery or property, the money you make counts as an inflow in this category.

Cash from financing activities

Cash flows from financing activities include cash from bank loans, issuing shares, and small business crowdfunding efforts. It also covers things like repaying debt, paying dividends to shareholders, and using business credit cards for expenses.

If, say, you’re setting up a limited company and need an injection of capital to get things moving, your financing activities might involve taking out a loan to cover startup costs or buying equipment on credit. For more established businesses, the category could include refinancing debt or distributing dividends to investors.

How do you calculate net cash flow?

There’s a straightforward formula to calculate net cash flow for your business. It deducts all the cash going out from all the cash coming in, like this:

Net cash flow = total cash inflows – total cash outflows

To see how this works in practice, let’s say that one of your side hustle ideas brought in total cash inflows of £4,000 last month. Over the same period, your total cash outflows were £1,600. We can apply the formula to find your net cash flow:

£4,000 - £1,600 = £2,400

Here, we can see that your net cash flow from your side hustle is £2,400 for the month. It’s all pretty simple.

Alternative net cash flow formula

A more granular way to calculate your business’s net cash flow is by breaking down the individual net cash flows from operating, investing, and financing activities. Using this approach, the formula for net cash flow is:

Net cash flow = net cash flow from operations + net cash flow from financial activities + net cash flow from investing activities.

It might not roll off the tongue as easily as the basic formula but doing it this way offers a major plus: it gives you a clearer view of your small business finances. By assessing the components that make up your total net cash flow, you can see exactly where your cash is coming from and where it’s going.

Here’s what each type of cash flow can tell you:

  • Net cash flow from operating activities shows whether your business is able to generate enough cash from its products and services to remain viable.

  • Net cash flow from investing activities tells you how much you’re investing in the business and whether those investments are worth it.

  • Net cash flow from financing activities lets you see how you’re funding the business and handling things like loans or shareholder dividends.

Net cash flow example

Imagine you run a children’s clothing store and you want to calculate your net cash flow for the past year.

Steady sales and careful cost control have given your business a net cash flow from operating activities of £30,000. However, the net cash flow from investing activities is -£10,000 because you bought new displays and upgraded your shop’s interior. Thanks to a successful small business loan application, net cash flow from financing activities is £15,000.

Using the net cash flow formula (adding all the different net cash flows together), here’s how you’d calculate your total net cash flow for the year:

£30,000 + £15,000 - £10,000 = £35,000

So, your total net cash flow is £35,000. This tells you that after accounting for all revenues and expenses, you have a significant positive net cash flow.

This means you could put some serious thought into how to scale your business. You’d have several options for reinvestment.

For example, you could expand your retail business into a second location, improve your product line, or even branch out online to reach more customers. An online store would be a great way to grow your business without incurring the overheads of setting up another physical shop.

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Positive versus negative cash flow

Positive net cash flow means your business is bringing in more cash than it spends, indicating a healthy financial state. It allows for growth and investment, and means you have a financial safety net which can deal with unexpected expenses.

However, if your net cash flow is consistently high, you might want to consider reinvesting to avoid missing out on new business opportunities.

Positive net cash flow is the goal for most businesses. But if you’re wondering, “Can net cash flow be negative?”, where your business spends more cash than it generates, the answer is yes. 

This isn’t always a problem. After all, you might fall into negative net cash flow due to initial startup costs, or because you’re making investments in equipment like self-service kiosks which will reap dividends in the longer term.

Even if your negative net cash flow is due to other reasons, having robust small business risk management processes and/or a healthy cash reserve can mitigate the issue for a while. But if your negative net cash flow situation rumbles on, it could be a sign that you need to amend your products and services to meet market requirements.

A business might have positive overall net cash flow, but if you look closer, you might find that it’s heavily reliant on financing while losing money on daily operations. This kind of insight helps you make better decisions for your business.

Finding the data for net cash flow calculations

Whether you prefer the basic method or the more detailed approach, understanding how to find net cash flow is just the start. You also need to know how to source the numbers that feed into the formulas.

If you’re on top of bookkeeping for small businesses, your cash flow statement is the best place to look. Along with the balance sheet and income statement, the cash flow statement is one of three key financial documents for any business. It breaks down cash flow into the three main activities we’ve discussed: operating, investing, and financing. Plus, it does the sums to show your net cash flow overall.

A cash flow forecast can also be handy. It helps you see what your cash flow might look like in the future, which is useful when working on a small business budget or deciding where to invest or cut costs.

If you’re new to bookkeeping – or just need a recap – here’s where to find the numbers you need for net cash flow calculations:

Operating activities

To track cash inflows from your everyday business operations, look at your sales receipts, invoices, and bank statements. Some point-of-sale systems, like POS Pro, will allow you to check sales data with a few taps on a screen. For expenses, review documents like utility bills and payroll records.

If you’re asking yourself what is the net cash flow from operating activities, the calculation is straightforward. You simply subtract your total operating costs from your total income from core business activities.

Investing activities

To understand cash flow from investments, check receipts and records for asset purchases, like new equipment, and any sales of assets or property.

Wondering how to find the net cash flow from investing activities? Subtract the total cash spent on investments from the total cash earned from selling assets.

Financing activities

For details on your financing-related cash flows, you might review loan agreements, shareholder reports, business credit card statements, and any records from crowdfunding campaigns.

To calculate net cash flow from financing activities, you deduct the cash paid for debt and loans from the cash received through financing sources.

How often should you calculate net cash flow?

Keeping track of your net cash flow is essential, but how often should you do this? The frequency depends on your business needs and how much you want to stay on top of things.

A good rule of thumb is to look at your net cash flow monthly. This regular check helps you catch issues early and keep your business on track. However, in a busy food and drink business like a café, where cash flow can fluctuate on a day by day basis, weekly checks might be more suitable to ensure you’re not missing anything. For a broader perspective, quarterly reviews can be useful, showing you trends over time. This approach can help you make bigger decisions, like when to expand or invest in new equipment for your enterprise.

It’s all about what works best for you, whether that’s a quick look daily or a deeper dive monthly. Either way, understanding net cash flow isn’t just for existing business owners. Even aspiring entrepreneurs thinking about how to start a side hustle can benefit from getting to grips with how net cash flow works.

For example, imagine you’re considering setting up a weekend market stall to sell handmade jewellery and accessories. Forecasting your net cash flow helps you understand whether your stall could be profitable, if you’ll have extra cash to invest in new materials, or if you need to think about how to price a product differently. 

By looking at the possible cash flows for your new market stall, you can make sure it gets off to a great start and has what it takes to grow.

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How to improve net cash flow

It’s natural for business owners to wonder how to improve cash flow – after all, this can be crucial to long term success. Here are some tips to help keep it positive.

1. Reduce unnecessary costs

Regularly review your expenses to identify and cut unnecessary costs. Doing a SWOT analysis for small business can help you spot potential areas for cost savings. Consider low cost business ideas and working from home to save money on operating costs without sacrificing quality.

2. Encourage early payments

Offering discounts to customers who pay early is a great way to encourage prompt payments. You can also set up flexible payment terms to maintain customer loyalty while boosting cash flow. Creative ways to make money from home, like offering online consultations, can also attract early payments.

3. Pursue more sales

Look for new opportunities to increase sales. This could involve expanding your service offerings, developing a long-term marketing strategy for small business, or tapping into passive income ideas like selling print-on-demand items online. Collaborations with other companies can also help you reach new customers and improve cash flow.

4. Secure financing

When needed, explore financing options like crowdfunding or business loans. A cash advance can also provide the funds needed to bridge gaps in cash flow and give you quick access to working capital. Remember, though, it’s important to understand the T&Cs of financing options before you commit.

5. Use accounting tools

Invest in accounting tools for small businesses to track your cash flow in real-time. This can make it a lot easier to identify cash flow trends and respond quickly to issues. With these tools, you can manage expenses, generate reports, and maintain accurate financial records for your business. 

6. Keep close tabs on inventory

Stay on top of inventory levels to avoid overstocking or running out of products. A lean inventory can free up cash and improve operating cash flow. Consider low cost high profit business ideas that require minimal inventory to lower your financial risk and boost your net cash flow.

7. Delay major purchases

If net cash flow is tight, delay large purchases or investments. Instead, focus on operating cash flow and consider growth strategies that require lower investment. Business ideas from home or online business ideas can be a lot less costly to start and maintain.

8.  Focus on customer retention

Strong customer relationships lead to repeat business, which helps stabilise cash flow. Offer loyalty programs or other incentives like gift cards to encourage customer retention. You can also explore email marketing, such as sending out online newsletters, surveys and exclusive new product announcements to customers who’ve provided their details.

9. Plan ahead

Don’t underestimate the power of cash flow forecasting to help you anticipate future needs. This involves looking at sales trends and expected expenses, allowing you to plan for seasonal fluctuations or unexpected costs. This can be especially helpful when starting a new business or exploring business growth strategies.

10. Invest in technology

Investing in enterprise tech can streamline your business and improve net cash flow. If you’re exploring how to start a business from home, for example as a local handyperson, a simple card machine might be all you need to process payments. For larger ventures, a more robust point-of-sale system can handle sales and inventory, offering a more efficient way to manage cash flow.

Manage money properly

Keeping your business and personal finances separate is vital for tracking cash flow. A SumUp business account helps you manage your incomings and outgoings with ease, wherever you are.

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Disclaimer: The contents of this page are intended for informational purposes only and should not be construed as professional advice. For matters requiring legal or financial expertise, it’s recommended to seek guidance from qualified professionals.


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