The Net cash flow or cash flow statement (“cashflow”) refers to all the money inflows or outflows that a company, investment or project has during a given period of time. Net Cash Flow emerges as an essential tool for analyzing the financial health of the company in question and for understanding its viability as a project, and it is a tool that, despite the fact that until recently it was only known by financial professionals and investment firm teams, is becoming more popular every day among small businessmen and managers. Net cash flow focuses on demonstrating the actual liquidity that an organization, project, or investment may have. That is, it reveals the amount of cash that can be used to make payments, such as to suppliers, salaries, debts, interest, among others. It should be noted that Net Cash Flow is focused solely on all those movements (inputs or outputs) that are purely cash. That is, collections or payments that are made with money, leaving aside all those records in the form of debts receivable, debts payable, intangibles, or that do not imply cash or cash inflow or outflow. That is, it leaves accounting records aside. The Net Cash Flow and its use to carry out various exhaustive analyzes cannot be missing within an entity since it allows to improve the efficiency in the decision making of the company through evaluations on the capacity to generate cash and the measures that represent the financial strength or liquidity of an organization. In this article, we will explore cash flows in detail, considering their importance, types, uses and interpretations that can be beneficial for the development and knowledge of companies. Day-to-day examples will also be provided.

As mentioned, Net Cash Flow is one of the main tools for monitoring and measuring the financial and treasury performance of an organization. Within this, those movements of money that represent income and exits at the time they are made must be recorded. The difference between these two (income – output) finally reflects the net result. That is, if the company is generating or entering more money than it is spending, or vice versa.

In the event that the result of this operation is negative, it will be prudent to analyze the sales or commercial strategies or the associated expenses that may be taking place in excess or their reasons for existing. In this way, any type of problem that may arise and affect the continuity of the entity’s operations can be avoided. On the other hand, if the result is positive, what can be done with said money will be analyzed and the company’s ability to meet its financial obligations in relation to its liquidity will be evaluated. In this way, indebtedness can be avoided since it will be known if the company will have what is necessary to pay a debt moments before acquiring it or, as an alternative option, investment decisions or dividend reimbursement to investors can be analyzed.

Being a record of entries and exits during a specific period of time, managers or managers can make fundamental decisions regarding strategies depending on the moments in which there is a shortage or abundance of liquidity.

The Net Cash Flow also allows you to make long-term planning and projections about the business in general or about a specific investment project. Through planning, the company will be able to come up with new strategies and create cash balances as a contingency in the event that adverse situations appear, knowing what they should spend or invest in, what money to allocate to savings and at what time of the year it is best to carry out each operation.

It is very important to note that cash flows are reports that investors and lenders request in all cases, so keeping the company healthy in the financial sense will give a good face when needing investment. It will prove to be a viable project.

There are three main types of net cash flow within a company. The differentiation of these helps to analyze in which sector or operation the cash is being entered or spent and with this to be able to improve decision making. The three types of Net Cash Flow are as follows:

Operating cash flow

The Net Operating Cash Flow is that financial measurement that records the movements of cash that have to do with the operations or main commercial activities of the company during a determined period of time. That is, it determines the ability of a company to obtain liquidity through day-to-day operations, that is, the cash inflows derived from the business (sales, subscriptions, etc.), and the cash outflows derived from operating the business ( salaries, taxes, rentals, etc.), discarding all those that are related to financing or investments.

Net Operating Cash Flow can be calculated in a number of ways. However, the most common way to calculate it is from the company’s profit and loss statement. The formula to obtain the result of the operating net cash flow is the following:

Operating Cash Flow= Operating Income-Operating Expenses ± Changes in Working Capital

Operating income represents those that come from the sale of goods or services of the company, while operating expenses are costs of goods, production, sale, administrative and everything related to the main operations of the entity. Changes in working capital are added or subtracted depending on whether they are assets such as accounts receivable or inventory, or liabilities such as accounts payable.

Operating cash flow is essential to analyze whether the company is covering its operating costs with its main activity. Knowing this is critically important for long-term sustainability, continuing operations, and paying off debt. It is also important for investors since it demonstrates the profitability of the activity to which the company is engaged and to realize if the management is effective or if there are flaws in the operational or commercial strategies.

Investment cash flow

The investment cash flow is one that shows the inflows and outflows of capital related to the investment activities that a company performs. The financial investments that are made are usually tied to financial instruments such as long-term assets or purchase and sale of non-current assets such as capital goods, equipment, investments in other companies, dividends, properties, among others. In short, they are the income or outputs from activities related to different financial instruments.

This Net Cash Flow implies importance within the liquidity position of the organization and helps those in charge of making decisions to know if it is the optimal moment to invest or sell the assets in case of need to do so.

In the sense of the investment cash flow, if it is negative, it does not necessarily have to show a problem since this would mean that the company is investing significantly for its development and expansion. On the other hand, a positive Net Investment Cash Flow would indicate that the entity is disposing of assets or receiving payments for them.

Financing cash Flow

The financing cash flow is, in this case, the financial measure that the company is generating by cash inflows or outflows from purely financing activities. That is, for operations to finance the company itself, such as obtaining loans, issuing bonds or debt, issuing shares, etc. While the exits could be considered activities such as the payment of dividends, the payment of the requested loans, the payment of interest and the repurchase of shares.

The importance of this analysis in the company revolves around the fact that it gives the possibility of carrying out an evaluation of the effectiveness of the financing decisions that the organization in question is making. A negative flow of this type can mean that the company is paying interest, dividends, or repaying loans. On the other hand, the Net cash flow from positive financing means that the company has been financed externally through capital contributions from the partners, or loans, requested in order to meet its financial responsibilities.

This type of Net Cash Flow is relevant to give an image of the capital structure of the company and the way in which it is managing to carry out its projects through external financing. In the same way, it is in the interest of investors to know the debtor or creditor position of the company and how it is managing these financial operations.

Net Cash Flow is closely related to the profitability of a company or organization. Within the company, there is both accounting profitability and real profitability. Between these two, there are a series of differences that must be taken into consideration due to the confusion and ineffective decision-making that a misinterpretation between the two can lead to.

In the first place, accounting profitability is that which is directly reflected in the income statement (Profit and Loss Statement). It is evidenced as a percentage, which arises from the net profits and its relationship with the total income. It is true that this is a demonstration of the efficiency of the use of resources to generate benefits, however, it has several limitations since it is influenced by expenses and income that are not effective or that do not imply cash movements (neither inputs nor outputs ) as can be depreciation, amortization among others that can alter the nature or veracity of the desired results.

Profitability based on the cash flow statement or also called real profitability discards all those accounting income that have not yet been made or at least not at the time of making the strategic decisions necessary for the proper functioning of the business. The focus in this case is on business operations, where the main profits of the company must be produced. In this way, a more precise vision is used so that, in the same way, decision-making takes precision in the same way and causes sustainable profitability. And thus, the financial health of the company is demonstrated to investors and stakeholders.

The most appropriate thing is to find the optimal point between both types of profitability and work together with them. Financial metrics or KPIs can be obtained so that decision making and management can be optimized.

Below, we present a practical case to better understand how cash movements work within a company and how they are recorded in the Net Cash Flow statement.

A furniture company generated €14,000 in cash from the sale of its products during the month of August. Later, to improve the quality of their furniture, they bought state-of-the-art equipment valued at €7,000. Finally, the company requested a loan for €3,000 which was granted.

Analyzing these data, we see that the €14,000 that came in from sales represents a positive operating net cash flow, then we have €7,000 of investment in equipment which means a negative net investment cash flow having paid the supplier for them, and Finally, a positive net cash flow from financing, having received €6,000 for the loan.

Given this, the net cash flow of the company for that specific period results in a positive value of €13,000 due to the sum of the operating and financing flows, and the subtraction of the investment flow. A positive result indicates that the furniture company has generated more cash than it has spent in that time period. The company, therefore, is in a stable state of financial health (In this simplified example). With this positive value, the company could pay its financial obligations, make investments or reinvest in the same business for its growth later.

In conclusion, the net cash flow is a financial tool used to mainly measure the liquidity and financial health of a company, project or investment. Cash flows only record the inflows and outflows of capital that have been made. There are three types of cash flows: operating, investing, and financing. It is commonly used by companies to demonstrate their real profitability both to investors and to the members themselves in order to make more efficient decision-making.

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