October 29, 2024
·
Martin Frérot
·
7
min
.png)
Net cash flow is a key financial indicator whose main function is to precisely reflect a company’s liquidity status and overall financial health. Net cash flow is something that is measured — it reveals how much cash a business generates and uses within a defined period of time. Here, we will cover net cash flow basics, different types of net cash flows, standard calculation methods, and, finally, modern tools that can streamline the tracking and analysis of cash flows.
Put most simply, net cash flow is the difference between a company’s cash inflow and outflow within a specific period of time. It’s a critical measure of liquidity — it shows how well (or poorly) a company is generating money, which is then used to fund daily activities, investments, and financial obligations. Net cash flow can be positive or negative. If it’s positive, this signals financial strength; if negative, finance teams can be sure that real cash management challenges lie ahead.
Net cash flow is a composite indicator, as it comprises different sources and uses of cash within a company. Typically, these are operating activities (day-to-day business processes), investing activities (purchases and sales of assets), and financing activities (mostly payments and transactions related to debt and equity). Taken together, these three components provide the most comprehensive view of a company’s cash position and financial strengths or weaknesses.
Operating cash flow is generated by a company’s core business activities, meaning, in practice, revenue from sales and costs of goods sold. As such, operating cash flow reflects the capital generated from a company’s daily operations. So, on a more general level, it is also a reliable measure of a company’s operational efficiency.
Investing cash flow is the difference between cash inflow and outflow from investments in assets, typically property, equipment, or securities. Here, negative investing cash flow is not necessarily a bad thing. In fact, negative investing cash flow is quite common for a company that is pursuing growth and investing earnings into expanding operations.
Financing cash flow consists of cash transactions — issuing debt, repaying loans, and paying dividends — linked to funding the business. Positive financing cash flow typically signals new capital income, while negative financing cash flow may indicate activities such as debt payments or shareholder dividends.
Successful monitoring of net cash flow is essential in managing a business's liquidity. It ensures that a company has enough money at its disposal to meet short-term obligations. In other words, effective management is important for a company’s financial stability in total, as it helps avoid cash shortfalls and potential liquidity crises.
Net cash flow data is, of course, important in forecasting and long-term planning too. After analyzing historical cash inflow and outflow, businesses can prepare for future cash needs — supporting, for example, strategic investments or adjusting spending to align with financial goals.
When using the direct method, finance teams calculate net cash flow by tallying all cash receipts and disbursements. The direct method is straightforward and provides a clear view of cash from operations. However, it may also require detailed transaction records and can be labor-intensive, especially for large companies.
The indirect method adjusts net income for non-cash items — such as depreciation — and changes in working capital to calculate net cash flow. Typically, this method is used for financial reporting because it aligns with accrual accounting principles.
A cash flow shortfall is a situation in which cash outflow surpasses cash inflow. This lack of balance puts business operations at risk. To put it simply, it’s a situation in which a company doesn’t have enough money at its disposal to deal with daily financial obligations and activities. To address this, a business will usually try to negotiate extended payment terms with suppliers, secure short-term loans, and expedite receivables. The idea is simple — maintain liquidity and operational continuity by boosting immediate inflows and alleviating short-term outflow pressure.
Discrepancies between inflows and outflows often produce cash flow challenges. For example, a company may see high cash inflow during a peak period — such as seasonal sales — but must manage consistent expenses in total, meaning mostly year-round. This is a timing issue, and to balance it, companies can adjust billing cycles or work with flexible payment terms. This approach better aligns inflows with outflows, ultimately reducing cash flows disparities throughout the year.
Treasury management systems, or TMS for short, are comprehensive platforms used by businesses to operate and organize various aspects of financial planning. Contemporary ones can also come with cash flow management add-ons, i.e., tools that allow businesses to monitor cash inflow, cash outflow, and overall expenditures. These modules provide financial teams with comprehensive visibility into financial data — for example, total cash flow and expenses. Thanks to these centralized platforms, businesses can track expenditures in real-time. This then improves their capacity to make informed decisions about current financial commitments or future investment opportunities.
Some of the latest tools for cash flow analysis are powered by AI. These can help businesses predict trends by analyzing both real-time and historical data, providing the foundation for proactive cash management. They are extremely useful in detecting spending patterns, predicting cash inflow and outflow trends, and optimizing resource allocation. As a result, companies can better understand and mitigate risks related to liquidity and unplanned expenditures. In this regard, proactive management is about planning around expenditures, adjusting cash flow strategies as needed, and making data-based decisions that ultimately improve financial performance throughout the year.
For example, Payflows’ AI Financial Analyst can help businesses unlock detailed insights into spending and net cash flow, and this can be achieved through simple, natural language queries. Similarly, the AI Cash Manager feature can help businesses anticipate daily liquidity needs. This is done by applying AI-powered balancing rules, leading to efficient cash management across multiple accounts with minimal effort.
Effective integration of TMS platforms — and cash flow add-ons — with ERP and accounting systems will consolidate data from various departments. This integration is a cornerstone for creating a streamlined analysis of total expenditures, cash flow, and other essential financial activities. Additionally, the integration enables real-time updates to cash flow activities, tracking cash inflow and outflow across the business structure. It also improves data visibility for teams, supporting seamless coordination of expenditures and enhancing financial stability.
For a company that wants to manage cash and expenditures effectively and maintain financial stability, conducting accurate net cash flow analysis is of vital importance. Nowadays, modern TMS platforms come with comprehensive features, including real-time data tracking, automated forecasting, and centralized capital management. These advanced tools allow companies to come up with a reliable formula for optimizing cash flow.
Payflows’ TMS system — and AI modules — are exactly such tools. They are a one-stop shop for cash management. Key features include automated cash forecasting with customizable scenarios, secure global payment workflows, and instant banking reconciliation, which reduce manual tasks and accelerate financial close processes. By providing these solutions, Payflows aims to help companies in their efforts to maintain efficient financial management and focus on long-term strategic growth.
