Net Cash Flow – Definition

Cite this article as:"Net Cash Flow – Definition," in The Business Professor, updated December 14, 2018, last accessed June 5, 2020, https://thebusinessprofessor.com/lesson/net-cash-flow-defined/.

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Net Cash Flow Definition

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.

A Little More on What is Net Cash Flow

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 firm’s 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.

References for Net Cash Flow

Academic Research on Net cash flow

A construction project net cash flow model, Kenley, R., & Wilson, O. D. (1989). Construction Management and Economics7(1), 3-18. This academic research work suggests a construction project cash flow model which was built upon the logit transformation process. This study, however, records that this model was found to possess an excellent fit of more than 75% of the total data analyzed from the project. The model was found as a useful tool as far as post hoc examination of construction project net cash flows is concerned. This study shows that this model is capable of adapting to any degree of inter-project variability and also flexible enough to be applied to any problem regarding the net cash flow.

Stock price reactions as surrogates for the net cash flow effects of corporate policy decisions, Lanen, W. N., & Thompson, R. (1988). Journal of Accounting and Economics10(4), 311-334. According to this research paper, a rational market structure was adopted to study the similarity between the resulting price reaction and the cash flow effect of management policy decisions. The main aim of this test is focused on the examining of the cross-sectional association between the underlying properties of the affected firms and the cash flow effects. The result from this test shows that it is not possible to conclude the sign of the association between any property of the firm that is observable before the inception of the announcement of the decision of the management and the reaction of the stock price.

Monetary policy and the chaotic structure of net cash flow from investment-operating and liquidity, Juárez, F., Mesa, F., & Farfán, Y. (2014). WSEAS Transactions on Business and Economics, 405-418. This paper explains the monetary policy as well as the chaotic structure of the net cash flow from the study of liquidity and investment operations.

Empirical Research on Accounting Profits and Net Cash Flow of Chinese Public Companies-Analysis Based on Profitability, Yang, D., Wang, F. S., & Du, X. L. (2006). Journal of Modern Accounting and Auditing2(4), 31-36. This research paper studies the empirical result of the research on accounting profits and the net cash flows of the Chinese republic companies. However, this study also analyses this research based on the level of profitability of these companies.

A Conceptual Framework for the Indirect Method of Reporting Net Cash Flow from Operating Activities., Wang, T. J. (2010). American Journal of Business Education3(12), 19-32. According to this research thesis, the main concept of the reconciliation behind the indirect method of the statement of the cash flow was studied. A conceptual scheme was used to show how cash basis and accrual accounting methods related to each other and to also demonstrate the concept of reconciling these two main accounting methods. According to this paper, the conceptual framework sees an additional set of effects as defined in the Accounting Standards Codification 230-10-45-28 and the International Accounting Standards 7.18 (Statement of Financial Accounting Standards No.95) as regards the indirect method which makes the whole process of reconciliation between the cash-basis and the accrual completer and more satisfactory.

Motivations for bank mergers and acquisitions: enhancing the deposit insurance put option versus increasing operating net cash flow, Benston, G. J., Hunter, W. C., & Wall, L. D. (1992).  (No. 92-4). Federal Reserve Bank of Atlanta. According to this research paper, the bid of price for targeted banks in the early to mid-1980s were examined. According to the result from these test, two mains hypothesis were postulated and they were further examined. The first hypothesis is the earning diversification hypothesis while the second is known as the deposit insurance put-option hypothesis. Discussions were made and these hypotheses were both analyzed in this paper. In this paper, an empirical test of a sample of 302 mergers yielded results that are termed as consistent with the earnings diversification hypothesis and relatively inconsistent with the deposit insurance put-option hypothesis.

Adjusting Capitalization Rates for the Differences Between Net Income and Net Free Cash Flow, Mercer, Z. C. (1992). Business Valuation Review11(4), 201-207. This research paper explains the process of adjusting the rate of capitalization for the differences between the net free cash flow and the net income. These two factors were both explained and their differences were stated in this study.

The role of net cash flow in insurance group′ s operational management, Kai-long, N., & Biao, J. (2010). Insurance Studies1, 015. According to this research thesis, the role of the net cash flow in the insurance group’s operational management was studied.

After-Tax Net Cash Flow Mathematical Model, Escobar, J. E. (2009, January). In IIE Annual Conference. Proceedings(p. 162). Institute of Industrial and Systems Engineers (IISE). This research paper studies the after-tax net cash flow by making use of a mathematical model. This model, however, generated an empirical result which was later used in this study to explain the After-tax of the net cash flow.

Company Evaluation Using The Discounted Net Cash Flow Method, Sichigea, N., & Sichigea, D. F. (2006). Journal of Applied Economic Sciences1(1 (1) _2006), 61-67. This paper examines the company’s evaluation by adopting the use of of the discounted net cash flow method. This evaluation was made possible by first studying the concept of the discounted net cash flow method.

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