How to Calculate Net Cash Flow

Friday, 18 Jun 2021

Entrepreneurs in Melbourne are always concerned about the cash flow of their business as it determines its stability and success. It helps them to understand the financial status of the company and make investment and business decisions accordingly.

Every small or big decision, including paying debts and taxes or purchasing stock and equipment, is dependent on cash flow. Thus, calculating it correctly is a significant part of running a business and relying on expert bookkeepers in Melbourne for  this part makes sense.

Professionals are capable of taking into account all the cash flowing in and out of business without making errors. However, it is significant for the entrepreneur to understand the calculation process to have a fair knowledge of basic accounting and bookkeeping. So, here is how net cash flow can be calculated in a detailed manner.

What Is Net Cash Flow?

Bookkeepers use the net cash flow to determine the profitability of the business in Melbourne. It is defined as the difference between the cash coming into the business and the cash going out of it during a specific period.

If the difference is a negative figure, the business is incurring losses and needs to work on improving its cash flow. The net cash flow includes three main components that are listed below.

Operating activity: It is the cash that the company generates from its operations and spends on running the business. If the operating cash flow is a big amount, it implies that the business is performing well. It includes generating income from the payments made by the customers and spending on marketing and the cost of goods sold.

Financial activity: It is the cash that comes from debt agreements and paying off debts and dividends.

Investment activity: It is the cash received from profitable investments or funds issued to purchase an asset in Melbourne.

How Businesses Utilise the Net Cash Flow?

Net cash flow offers information about the gain or loss of capital during a specified period. If there is surplus capital left after spending on the operating activities in Melbourne, the business has a positive cash flow.

On the other hand, if the expenses are way higher than the incoming, the business has a negative cash flow. However, it does not mean that the business is failing. It simply implies that the company was unable to meet its financial obligations for a given period.

Bookkeepers review net cash flow for different periods to make comparisons. It helps them to understand the trend of cash flow and identify the sustainability of the business in the long run.

A few periods of negative cash flow are a part of running the business. Every company goes through dry spells at some point. However, the bad phase should not long for months, and the company must come back to its original state of profitability through sales growth.

The business can meet the obligations during a negative cash flow period by liquidating its assets or applying for a loan in Melbourne.

However, the positive cash flow achieved through a rise in sales and reduction in expenses is better than a positive cash flow accomplished by incurring new debts. Thus, bookkeepers emphasise cost-cutting measures and enhancing incoming capital to ensure long-term success for the business.

Significance of Net Cash Flow for A Business

Calculating the net cash flow is an essential part of the activities performed by bookkeepers because it gives an insight into the amount of capital available for running the business in Melbourne.

It is needed to make payments for regular expenses, such as utilities, supplies, stock, rent, etc. Thus, a positive net cash flow ensures that the company has sufficient funds to pay its bills and debts on time.

The bookkeeper stays on top of this amount over specified periods and understands the factors that are leading to a drop in the cash flow. The trends help in identifying the weak links and getting rid of them to avoid huge losses in the future.

Most moneylenders and financial institutions in Melbourne assess the net cash flow of the business to determine its ability to repay. If you have a negative cash flow, getting the loan you need can become a challenge. Thus, businesses strive to maintain a positive cash flow with the help of their bookkeeping companies.

Calculating Net Cash Flow

The formula for calculating net cash flow is as follows:

Net Cash Flow = Cash Flow from (Operating + Financial + Investment) activities


Net Cash Flow = Cash Receipts – Cash Payments

Cash receipts include payments from customers, loan receipts, refunds from suppliers, funding received from a third party, insurance claim, sale of fixed assets in Melbourne, etc.

Cash payments include salaries and wages paid to the employees, rent, utilities, payments made to the vendors, etc.

Let us use the first formula to calculate the net cash flow.

The operating activities of Company X indicate $25,000 incoming and $10,000 outgoing. Its investment activities indicate $5,000 incoming and $10,000 outgoing, and its financial activities indicate $15,000 incoming and $10,000 outgoing. Therefore, the net cash flow of Company X will be:

Net Cash Flow = (25,000 – 10,000) + ($5000 – $10,000) + ($15,000 – $10,000)

Net Cash Flow = ($15,000) + (-$5000) + ($5000)

Net Cash Flow = $15,000

Thus, Company X managed to record a positive cash flow even though the investment activities did not bring the expected return on investment. The bookkeeper analyses the net cash flow for every month and ascertains the profitability of the business using the parameter.


Entrepreneurs need to be aware of the financial statements and parameters to understand the viability of their business and its ability to stay afloat in tough times. Thus, bookkeepers in Melbourne calculate the net cash flow to provide them with the correct information and maintain a positive bottom line.



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