Keeping an eye on your net cashflow is a great way to monitor the financial health of your business. We’ve broken down what net cashflow is, when to use it and how to calculate it.
What is cashflow?
Cashflow is a term that 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 net amount of money your business is expected to bring in or pay out during a given period (for example, 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’ and a negative net cashflow - where your business has more money going out than coming in - is sometimes referred to as ‘net cash outflow’.
This metric is useful in helping you achieve a clearer picture of what your finances will look like in the future. Keeping on top of net cashflow can give you a good idea of your business’s financial health over the time period you’re measuring and, crucially, it can tell you whether your business is expected to earn money during that period.
How to work out your business’s net cashflow
A simple formula to work out your net cashflow for a particular period is:
Net cashflow = cash inflow - cash outflow
Your net cashflow calculation should include all of the money coming into and leaving your business over the relevant period. Your accountant will be able to help if you’re unsure about whether or not something should be included.
What happens if your net cashflow is negative?
A negative net cashflow total 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 one-off costs in setting up your business that you won’t have to deal with again in the future. What’s more, your cash inflow may well improve in the near future as your sales increase.
Working out your net cashflow in advance can help you see potential shortfalls before they arise - so you may have 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. The feature will also provide smart suggestions to guide you through any shortfalls and help you take action. Take a closer look at Cashflow in FreeAgent and start your 30-day free trial.