Net Cash Flow - Explained
What is Net Cash Flow?
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Table of ContentsWhat is Net Cash Flow?How is Net Cash Flow Used?Academic Research on Net cash flow
What is Net Cash Flow?
Net Cash flow is the difference between the cash inflow and cash outflow of a company in a given period of time. It is useful for measuring the short-term financial viability of a business. If a company continues to maintain the positive net cash flow over the years that indicates the company is financially viable.
How is Net Cash Flow Used?
The net cash flow is recorded in a company's financial statement by deducting the total cash outflow from the total cash inflow. It is the gain or loss of a company over a period of time after all debts are paid. If there is surplus cash after paying all its operating costs, then it is a positive net cash flow and if the company spends more than its earning it is negative net cash flow. A negative net cash flow doesn't mean the company is unable to pay all its obligations, it suggests the company's earning in that specific period is not enough to cover all its operational expenditure in that period. A company can pay for all its obligations while maintaining a negative cash flow. Net cash flow is an effective tool to measure a firms financial strength. However, it is important to analyze the net cash flow properly to get the real picture. Increased profits from sales or decreased obligations are reflected in a positive cash flow. This is a sign of a healthy financial condition of a firm. But it is to be remembered a positive net cash flow is not always an indicator of profitability. Money received from acquiring a loan or a lump sum loan deposit may result in a positive net cash flow but that may not indicate a healthy financial condition of the firm. Similarly, a short-term negative cash flow does not always indicate a weak financial condition. If a company decides to set up a new manufacturing plant, they will have to spend money to build up the plant. That will lead to a negative net cash flow but in future, the company will make a profit from this plant and that will help the company to grow. Net cash flow of a company helps a company to expand its operations, develop new products, pay dividends, buy back shares and reduce debts. Net cash flow is considered to be the most important measure by many business analysts. Investors often try to put their money in such company whose share prices are low, but the net cash flow is high or improving. This means the share price will rise in near future.