Calculating your business's total cash inflow is a vital part of understanding your company's overall financial health. As part of the net cash flow, or NCF, total cash inflow tells one part of the story of how well your business is doing and what next moves are available or advisable for you. It's also part of preparing the Cash Flow Statement, one of the most important small business financial documents.
The Meaning of Cash Flow
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The team from Wave, a payroll company, explains that cash flow reflects how money moves into and out of your business, such as through sales and expenditures.
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While it's a straightforward concept, there are several types of cash flow and corresponding ways and formulas to calculate them, and it's not as simple as just subtracting expenses from income. Moreover, a negative cash flow does not indicate imminent business failure. Understanding cash flow is critical to a business's success. Wave cites a study by CB Insights that found that 60 percent of small business owners don't feel knowledgeable about accounting or finance, and 30 percent of businesses fail because they run out of money.
Basics of Positive and Negative Cash Flow
While a positive cash flow can open many doors for a business, not all activities resulting in positive cash flow are necessarily good news for the business. The writers for GoCardless, a recurring payments company for businesses, explain that positive cash flow can result from taking out a large loan, for example, rather than making that same amount in sales.
On the other hand, the writers for FreshBooks note that negative cash flow can come from healthy activities such as investing in better equipment, and you can even have a high net income while having a negative cash flow. This can happen if your customers are on longer-term payment plans, since net income accounts for the entire sale amount, while net cash flow only accounts for the cash already paid, not the cash owed to you in the future.
Experts from The Bryn Mawr Trust advise investigating and considering the reasons behind negative cash flows, such as seasonal fluctuations in sales or changes in interest rates.
Total Cash Inflows
GoCardless enumerates the three types of cash flows a company can have: operating, investing and financial activities. Operating activities are what most people think of when they think of "doing business" and include sales income and administrative expenditures. Investment activities include profits from investments you've made or cash outflows from buying investments or fixed assets. Finally, financial activities encompass cash inflows from debts in your favor or outflows from paying dividends or debts you owe. Each of these cash flows can be positive or negative, and the Net Cash Flow, or NCF, is the sum of all of these negative or positive numbers.
To isolate the cash inflow specifically, the total inflow formula is operating inflow + investing inflow + financial inflow. Likewise, the total cash outflow is the sum of the three types of outflow. Putting these two together returns the discussion to the NCF.
However, understanding these cash flows themselves can be complicated, and Wave enumerates several types of cash flow calculations that are helpful barometers of your business's health. Operating Cash Flow, in particular, is often a business's most complex area, say writers for the Corporate Finance Institute.
Consider also: Cash Flow vs. Cash Savings