This article was last updated on 30th May 2022.
Calculating net cashflow can provide a razor-sharp insight into your business’s financial health. We’ve broken down what net cashflow is, how to calculate it and the insight it can provide.
What is cashflow?
Cashflow refers to money coming into and going out of your business, whether that’s physical cash or money in your business bank account. Money coming into your business is sometimes referred to as ‘cash inflow’ and money leaving your business is sometimes referred to as ‘cash outflow’.
What is net cashflow?
Net cashflow is the difference between the money coming into and going out of your business. It’s a metric that tells you the overall amount of money your business is expected to bring in or pay out during a given period (e.g. a quarter or a calendar year).
A positive net cashflow - where your business has more money coming in than going out - is sometimes referred to as ‘net cash inflow’. Whereas a negative net cashflow - where your business has more money going out than coming in - is sometimes referred to as ‘net cash outflow’.
Understanding net cashflow can give you a clearer picture of your future finances and, crucially, it can tell you whether your business is expected to earn money during a set period of time.
How to work out your business’s net cashflow
A simple formula for working out your net cashflow for a particular period is:
Cash inflow - cash outflow = net cashflow
Your net cashflow calculation should include all of the money coming into and leaving your business over the relevant period. If you work with an accountant and you’re unsure exactly what to include in your calculation, they should be able to help you.
If you find you have a negative net cashflow total this isn’t always a sign that your business isn’t viable in the long term. For example, if you’re just starting out, you might have incurred some initial costs in setting up your business that you won’t have to deal with again in the future. Your cash inflow may also improve in the near future as your sales increase.
Working out your net cashflow can help you see potential shortfalls before they arise - so you should have more time to fix any problems. If you’re seeing a negative net cashflow figure, then it’s often a good idea to dig down into your income and outgoings to see what you can do to improve it. We’ve compiled some handy tips that could help you improve your near-term cashflow.
See what’s ahead with your Cashflow forecast
FreeAgent’s Cashflow feature automatically builds a 90-day forecast for your business based on the data in your account, including invoices, bills, salary payments and upcoming tax liabilities, and suggests appropriate actions, such as chasing an overdue invoice or paying an upcoming bill. Take a closer look at Cashflow in FreeAgent and start your 30-day free trial.