Monday, 4 Oct 2021
Cash is the most valuable asset for any business. However, its management is a challenging task that can often lead to severe consequences. Thus, most business owners rely on bookkeepers in Melbourne to keep track of the flow of cash in the company.
It is essential for maintaining a positive bottom line and is a part of the financial statements that offer a peek into the performance of the entity. Net cash flow is a vital number calculated by the bookkeepers that informs the business owners about the success rate of their ventures in Melbourne.
It provides details about the financial stability of the business and how it can improve to expand and develop in the future. So, let us help you understand this financial term and its utilisation in an organisation.
Net cash flow is used to measure the profitability of the business and it showcases the amount of capital generated or lost by the entity in a given period. It is defined as the difference between the cash payments and receipts of a company.
Bookkeepers calculate this amount every month to put it on the cash flow statement. The net cash flow of a business in Melbourne is positive when it is able to save capital after paying all the debts and covering the operational costs.
If the consecutive calculations over a long period display a positive net cash flow, the company is considered to be financially healthy.
On the other hand, if the company is continuously providing a negative net cash flow, it is considered financially unstable and in shortage of required capital. It is a red flag and can even lead to bankruptcy. Thus, bookkeepers need to track it regularly and maintain a positive balance.
However, it is vital to understand that the net cash flow alone does not define the financial stability of an entity. Investors or lenders who are analysing the finances must also look at the debts, assets, and other expenses of the business in Melbourne. Sometimes, a company may present a positive net cash flow, but other indicators might suggest a different story.
Thus, it is imperative to look at the broader picture rather than settling for the positive net cash flow. A business may have a positive figure because it secured a loan to meet with its operational needs. So, this means that the entity is not financially balanced.
Similarly, a business in Melbourne might have invested in acquiring new equipment and this may show negatively in the net cash flow because of the high expenditure in the given month. However, it will increase their productivity and revenue in the coming quarters.
There are three types of net cash flow used by bookkeepers. They are described as follows:
Bookkeepers use a formula to determine how much cash came into the business and how much went out in a given period.
Net Cash Flow = Total Cash Receipts – Total Cash Payments
Another method of calculating the amount used by bookkeepers is as follows:
Net Cash Flows = Net Cash Flows from Operations + Net Cash Flows from Investing + Net Cash Flows from Financing
For example, if the net cash flow from operations for a business in Melbourne is $10,000, net cash flow from investing is $20,000, and net cash flows from financing is $-15,000, then the net cash flow will be:
Therefore, the net cash flow is $10,000 + $20,000 + ($-15,000) = $15,000
The net cash flow is calculated by bookkeepers as it is a part of the cash flow statement. The amount is needed by the entrepreneur to understand the viability of the business at a specific point in time.
It helps him to make informed decisions about future investments while analysing the liabilities of the company in Melbourne. It aids in understanding how much capital can be used for investment while making sure that the regular operations are not affected.
Net cash flow is generally used for developing new products, using new marketing strategies, adopting new technology, paying off debts/loans, investing in research, building infrastructure, paying dividends to shareholders, increasing benefits given to workers and much more.
A business with a negative net cash flow needs to work on improving the numbers with the help of the suggestions offered by the bookkeeper. A consistently negative net cash flow can spell doom for the business. Thus, tracking it is necessary for every venture in Melbourne to ensure its profitability.
Running a business comes with a plethora of responsibilities, and the most significant one is maintaining a financially viable venture. Thus, entrepreneurs must take help from bookkeepers in Melbourne to understand net cash flow for their businesses and how it can be best utilised for prosperity.