How to calculate net cash flow: What businesses need to know

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  1. Introduction
  2. How do you calculate net cash flow?
  3. What are the three categories of cash flow?
    1. Operating cash flow
    2. Investing cash flow
    3. Financing cash flow
  4. How do you interpret positive vs. negative net cash flow?

Net cash flow is the cash that remains after you subtract what your business has spent from what it has earned. Unlike profit, which can include non-cash factors such as depreciation, net cash flow is more concrete: Do you have enough money to pay your bills today? This week? This quarter?

Net cash flow determines whether your business will survive. If your net cash flow is consistently negative, you’ll eventually run out of money – regardless of how profitable you are on paper. Positive cash flow makes staying in business possible.

Whether you’re running a start-up or a well-established business, your net cash flow tells you how much money you have to work with after paying bills. Net cash flow can be a major factor in decisions such as hiring and investing. As of 2021, more than 9 in 10 small businesses in Australia, New Zealand, and the United Kingdom had logged at least one month of negative cash flow each year.

Below, we’ll explain what net cash flow is, how to calculate it, and why it’s one of the most important numbers for your business.

What’s in this article?

  • How do you calculate net cash flow?
  • What are the three categories of cash flow?
  • How do you interpret positive vs. negative net cash flow?

How do you calculate net cash flow?

To calculate net cash flow, use this formula to track what’s coming in and what’s going out:

Net Cash Flow = Total Inflows - Total Outflows

Inflows are any cash you’ve received, whether from sales revenue, customer payments, grants, loans, or any other source. Outflows are any expenses or payments you’ve made, such as rent, salaries, inventory, debt repayments, or taxes.

For example, imagine you earned $40,000 from sales this month but spent $25,000 on inventory, payroll, and other expenses. Your net cash flow is:

$40,000 - $25,000 = $15,000

That $15,000 is what’s left for you to reinvest, save, or spend.

What are the three categories of cash flow?

To better understand where your money is coming from and where it’s going, break it down into three main categories: operating cash flow, investing cash flow, and financing cash flow. Each category offers a different perspective on your business’s financial health.

Operating cash flow

Operating cash flow is the money from your core business operations. This cash comes in and goes out as part of day-to-day activities such as selling products or services and covering expenses such as rent, payroll, and utilities.

Operating cash flow shows whether your business can sustain itself without external funding. If you’re consistently running a negative operating cash flow, you’re spending more money than you’re earning through your primary business activities. That’s a red flag, even if other parts of your cash flow are positive.

Operating cash inflows include:

  • Cash received from customers for sales or services
  • Refunds or rebates from suppliers
  • Other income related to your core business, such as subscription fees or consulting payments

Operating cash outflows include:

  • Salaries and wages
  • Rent or office space expenses
  • Payments for inventory or raw materials
  • Taxes and insurance
  • Utility bills

Investing cash flow

Investing cash flow tracks the cash your business spends on or earns from investments in long-term assets. This might include buying equipment, upgrading technology, purchasing property, or selling assets. Though operating cash flow centers on today’s activities, investing cash flow is about building for the future.

Investing cash flow shows whether you’re using your resources to grow or improve your business. Negative investing cash flow is often a good sign because it suggests you’re reinvesting earnings – but it must be balanced with strong operating cash flow.

Investing cash inflows include:

  • Money from sales of equipment, vehicles, or property
  • Dividends or interest from investments in other businesses
  • Money from liquidating financial investments such as stocks or bonds

Investing cash outflows include:

  • Purchasing new equipment or machinery
  • Buying property, such as a new office or warehouse
  • Developing new software or technology
  • Acquiring another business

Financing cash flow

Financing cash flow informs how your business raises and repays money – the ways you fund the business beyond day-to-day operations. It tracks cash movements related to loans, investor funding, equity transactions, repayments, dividends, and more.

Financing cash flow shows how your business is capitalised – whether through debt or equity – and whether you’re repaying or raising money. A positive financing cash flow might mean you’ve taken on new loans or received funding, while a negative number could indicate repayments or distributions to shareholders. This category is particularly important for businesses in growth phases or those restructuring their financial strategies.

Financing cash inflows include:

  • Proceeds from loans or lines of credit
  • Money raised through issuing new shares or equity
  • Funds from investors

Financing cash outflows include:

  • Repaying loans or credit lines
  • Paying dividends to shareholders
  • Buying back shares from investors

When you combine operating, investing, and financing cash flows, you get your net cash flow, the bottom-line number that shows whether cash is increasing or decreasing over a set period. For example, imagine your business has a month in which you generate strong revenue, manage expenses, buy new equipment to improve operations, and make a loan repayment. Here’s what your cash flows might look like:

  • Operating cash flow: +$20,000
  • Investing cash flow: -$10,000
  • Financing cash flow: -$5,000

Your net cash flow would be: $20,000 - $10,000 - $5,000 = +$5,000

This means you ended the month with $5,000 more than you started with, even after reinvesting and paying down debt. That represents a healthy cash flow.

How do you interpret positive vs. negative net cash flow?

Positive cash flow means you’re bringing in more cash than you’re spending. Negative cash flow means the opposite. Positive cash flow means you’re in a good position to grow your business: you have enough money to invest, whether that means hiring, upgrading equipment, or saving for goals. But negative cash flow isn’t necessarily a bad thing – it could mean you’re spending money strategically, maybe by stocking inventory for a busy season or investing in new assets.

What’s important is to watch this number over time. High cash flow today doesn’t guarantee you’ll have it forever. Similarly, though occasional negative cash flow isn’t always bad, chronic negative cash flow is a warning sign your business is spending more than it makes. Make sure you understand why your cash flow is positive or negative so you can determine whether it’s an advantage or a liability for your business.

The content in this article is for general information and education purposes only and should not be construed as legal or tax advice. Stripe does not warrant or guarantee the accuracy, completeness, adequacy, or currency of the information in the article. You should seek the advice of a competent lawyer or accountant licensed to practise in your jurisdiction for advice on your particular situation.

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