Net Cash Flow: Formula

Net cash flow is a quantity widely used in financial and investment analysis to determine the remaining funds after deducting all expenses. In simple terms, net cash flow is the difference between money coming in and money going out.

Net cash flow is easy to calculate from the balance sheet, but it is preferable to use management reporting data, where all the company’s actual costs are deciphered. Today we will analyze two methods of calculating it - direct and indirect, and give examples of analysis using the NPV indicator.

What is net cash flow

So, net cash flow is an indicator calculated as the difference between income and expenses calculated using the “cash method”. I already mentioned once that net cash flow does not depend on the amount of accrued depreciation, because... accrued depreciation of assets does not affect their market value and does not require the expenditure of “real” money, therefore this cost item does not participate in the calculation of NCF.

It is immediately necessary to clarify the following. The legislation provides for the calculation of profit “by shipment”, i.e. Revenue accounted for on the balance sheet is the amount of goods shipped or services actually rendered. The sales amount does not depend on whether these goods (services) are paid for or not. It is from this amount that expenses are subtracted and the financial result is formed.

There is, of course, a small percentage of enterprises that consider profits on a “cash basis”, i.e. how much money was received into the cash register or bank account and how much was spent. But such companies belong to micro-enterprises; they, as a rule, exist autonomously, without attracting external investors.

As for medium and large companies, revenue is always accounted for by shipment. Let’s figure out how to link this with the concept of net cash flow (NCF). First, let's look at the structure of the NPV.

Cashflow – description and rules of the board game

The game consists of two game circles: “rat race” and “fast track”.

“Rat Race” is a circle with several color fields. “Fast Track” – the outer circle with major transactions, fields describing the financial goals and dreams that the player will strive for.

"Rat race"

This is the most dynamic, interesting and exciting part.

The goal of this tour is to ensure that your passive income exceeds your expenses.

Your task is to increase your passive income by owning a small amount of finance (for example, salary) and move on to the “fast track”. At this stage, you will have to acquire different assets and independently look for ways to escape from the “rat race”.

How to play?

At the beginning of the gameplay, each participant is asked to choose a profession and fill out an income report form. The selection is made by blind lot. You can be anyone: a janitor, a doctor. The profession card already indicates your expenses, liabilities, and your salary level. All liabilities are divided into monthly payments.

The player sitting on your right will be your auditor. He checks the correctness of the financial statements and makes sure that you do not make mistakes.

The player’s starting cash is his monthly income and savings. When the reports are completed, place a rat of your color on the start button and start the game. Players make their moves clockwise, taking turns rolling the dice.

Once on the sector field corresponding to the number on the die, follow the instructions of the sector or take a card with instructions for the action that you must perform. Each time you pass the yellow “salary” field, you receive your monthly salary.

When your passive income exceeds your expenses, you will enter the external gaming circle. The goal of playing on it is to increase your passive income by making profitable transactions and make your dream come true.

During the gameplay you will receive cash. They are not reflected on the balance sheet. You can dispose of them as you wish. Using speculation, you can increase the number of speculations and speed up the pace of your game, that is, quickly reach the level of large transactions.

If your cash flow is positive (revenues are higher than costs), you can get a loan from the bank for any amount. Just like in real life, loan funds are issued to you at a certain percentage (10% of the loan amount).

There are several colors on the playing circle:

Green – opportunities or deals. The game includes transactions with real estate, shares, the purchase of precious metals, and antique valuables. In the “large transactions” section you may come across an offer to join an LLC, and in the “small transactions” category you may come across an offer to open a startup.
Yellow – payment day or end of the conditional month. Crossing the yellow field, the player says “salary” and receives his cash flow for the month.
Blue – market. These cards offer the opportunity to sell assets. The player chooses whether he sells his assets or not.
Orange – charity. The player optionally donates 10% of his income. For a donation, the player is given the opportunity to play with three dice for the next three turns, accelerating his cash flow.
Purple represents significant life situations. For example, the birth of a child or dismissal. Most often, these situations affect the level of your income (expenses for a child appear) and the speed of the game (the player misses several turns).

In addition to the color fields, there is a “stuff” sector. These are unplanned expenses, costly events in our lives (treatment, urgent repairs of something, entertainment and emotional purchases).

In the “rat race” there are fields reflecting “the appearance of children in the family” and “being fired from work”. The game starts without children, but during the process you may have 3 children. Occupation cards initially indicate a fixed amount of expenses for the birth of a child.

Dismissal does not eliminate the need to make mandatory monthly payments to the bank. This game feature teaches you how to create a financial cushion to have in case you lose your basic income.

The “financial report” field teaches how to keep track of expenses and income in a statement. As the game progresses, players acquire assets and liabilities. Assets are funds that generate passive income, liabilities are expenses (monthly payments, loans, unplanned expenses).

Cashflow requires concentration. There are a number of deals with traps that generate negative cash flow, such as buying unprofitable properties that will not generate income for you.

"Fast Lane"

At this level you are also presented with trades and the choice whether to take them or not. The level has three fields that can hit your wallet: “divorce”, “financial audit” and “lawsuit”.

The game teaches another important skill - the ability to negotiate with the participants sitting at the table so that they help you achieve your financial goals. In life, this skill is necessary for building business relationships and finding partners.

Components of net cash flow

So, NCF includes the following components, or cash flows (CF):

DP from operating activities (Operation Cash Flow). This is the largest component of the NPV structure, because Any enterprise is aimed at making a profit primarily from current or operating activities. The OCF includes:

receipt of money from customers;
payments to suppliers;
rent;
wages and contributions to the budget;
current expenses (transport, business expenses, storage of goods, advertising, etc.).

Thus, OCF is profit from operating activities calculated on a cash basis.

DP from financial activities (Financial Cash Flow) includes payments for receipt and repayment of loans and interest on them, payment of dividends and other expenses made from net profit. In other words, FCF changes the structure of equity and debt capital.
DP from investment activities (Investing Cash Flow) is an enterprise’s investments: placement of funds on deposits, income and expenses for the acquisition of securities of other companies, receipt of dividends and interest on these securities. ICF also includes any operations with fixed assets: acquisition, modernization, sale and payment of interest on loans issued for the acquisition of non-current assets.

So, net cash flow is equal to the sum of these three components - NCF, OCF and FCF.

What is Cash Flow (in simple words)

Cash Flow

(cash flow) is a set of inflows (receipts) and outflows (payments) of funds generated by the business activities of the company, distributed over time, regardless of their sources.

Cash flow in simple words is an indicator that describes the actual movement of money in a company, both cash and deposited in accounts. It shows where funds come from, where they go, and how much is left. Cash Flow calculations are performed both for the enterprise as a whole and for a separate department of this enterprise, a business segment, an investment project, or even a separate product.

Fundamental analysis has proven that cash flow has a direct impact on the efficiency of a company's daily operations. If the turnover is within normal limits, then the company fulfills its obligations on time. Otherwise, the company's owners will have to look for a way out of the financial impasse.

The most important indicators included in the financial flow:

investment costs;
tax payments;
loan payments;
and other indicators not related to the profit category.

A private investor should clearly understand by what criteria the movement of a company’s financial assets is classified.

What is taken into account when calculating financial flows?

Financial experts study the following cash flow indicators:

Transfer of finances by operational categories of the company's activities
. They take into account deductions for goods and services purchased for their own needs. This category includes tax payments and payments for employee employment agreements. The revenue part includes direct proceeds from the sale of goods and services. Additional income is calculated from recalculations made by the tax authority.
Investment flows
. These include the company's investments and the income received in terms of dividends, the difference between the purchase and sale of securities, coupon income from bonds and other options.
Credit flows
. Borrowed funds, payments of principal and interest are taken into account.
Flow direction
(positive or negative);
Volume
(gross, net);
Surplus or deficit
Cash Flow;
Continuity of formation
(regular or discrete).

In addition to the above indicators, economists advise distinguishing cash flow by the stability of the time assessment:

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Annuity (uniform receipt of financial flows);
Uneven (special schedule for receipt of funds).

For whom is NCF calculated?

Who needs to calculate net cash flow? The answer is simple - to all interested parties, namely:

company owners, senior managers;
investors;
creditors, incl. banks when considering a loan application;
competitors (for comparative analysis purposes);
tax authorities (to obtain detailed information on the movement of funds in current accounts).

The organization's net cash flow is clearly presented in the “Cash Flow Statement” appendix to the balance sheet. This form is submitted to the tax authority once a year by all legal entities, with the exception of small businesses.

Types of cash flows

There are several classifications of types of DP. We have already discussed one of them (by area of activity): NCF is the sum of net cash flows from current, financial and investing activities. How else are NCFs classified?

In relation to the company's activities, DPs are divided into internal and external. Internal DPs are the movement of funds within a company (holding), while external ones, accordingly, reflect mutual settlements with counterparties.
Based on the direction of movement, flows are divided into positive and negative. In simple words, positive DPs are revenues, and negative DPs are cash expenditures.
By volume, DPs are classified as excessive, sufficient or deficient. An excess of funds indicates that the company has poorly developed investment activities and steps should be taken to ensure that the money works and is not eaten up by inflation. For example, place funds on deposit or purchase securities of another company.

Where can I play live?

Live interaction with players and the opportunity to receive feedback from the coach are factors that attract not only fans of the game, but also newcomers. Cashflow clubs operate in all regions of Russia. There are many clubs in Moscow. Choose those clubs where good coaches work, who will help you identify your weak points and understand what needs to be worked on.

By the third game you will already understand how to win, and by the 7th you will most likely learn all the cards by heart. But experienced coaches will help you make sure that the game is not boring for you. To do this, there are many ways to complicate the game and work out any specific situation.

Artem Sidorin – entrepreneur, Cash Flow game coach, financial consultant

I organize games 2-3 times a week. While conducting the game, I give advice on financial literacy, ask the players different situations that test the participants for stress resistance and flexibility.

By creating such game situations, I help people identify their weaknesses, understand how competently they manage their finances, and whether it is easy for them to go astray.

The gameplay is dynamic, without artificially stretching time. In each game we play out specific life situations. I try to turn every game into training.

The coach’s task is not only to help you achieve the goal of the game and learn to transfer the experience gained into life. During 1.5 hours of play, the coach changes tactics.
With his actions, he not only helps you, but also distracts and interferes with you. The player’s task is to remain focused, not change his goal, and not be suggestible or gullible.

We usually hold games in the center of Moscow, in crowded places. This approach is not accidental, since a person is almost never in silence, and decisions have to be made when there is “white noise” around in the form of the opinions of others, advice, and everyday bustle. And the coach also screams in your ear, like, come on, make a decision.

There are also many people in the regions who play Cash Flow. Like-minded people can be found on social networks VKontakte, Instagram or ad platforms (Avito), city information boards. Look for good trainers who can teach you financial literacy and conduct a thematic game, for example, focusing on loans. View the game as a learning experience rather than a way to have a good time.

“Cash Flow” is a training through which you can truly become more successful and richer.

From the editor : By participating in Artem Sidorin’s games using the promotional code “PapaHelp”, you will receive a 15% and invaluable experience!

Formula for calculating net cash flow

Now let's talk about how to calculate net cash flow. There are two formulas for calculating this indicator. The general NCF formula looks like this:

\[ NCF=\displaystyle\sum_{i=1}^{n} (CFI_i – CFO_i),where: \]

\( CFI \) – incoming cash flows;

\( CFO \) – outgoing DS flows;

\( i \) – period number;

\( n \) – number of periods.

Let's assume we need to calculate NCF for 2 years. Let's take the initial data from the table:

Period	DS received, thousand rubles.	DS sent, thousand rubles.
Year 1	1000000	800000
Year 2	2000000	1650000

\[ NCF = (1000000 – 800000) + (2000000 – 1650000) = 550000 thousand rubles. \]

This formula is used if you want to calculate net cash flow without breaking it down by activity. And if you need to draw up a report on the movement of capital, the formula for calculating the NPV on the balance sheet is used:

\[ NCF = CFO + CFF + CFI, where: \]

\( CFO \) – DP – from current activities;

\( CFF \) – DP from financial activities;

\( CFI \) – DP from investments.

Each of the components of this formula is calculated using the algorithm given above.

Understanding financial significance

The analysis of the criterion under consideration, which characterizes the liquidity of an organization, its economic stability and development potential, seems significant for many reasons. First of all, it provides the opportunity to check the receipts and expenditure of resources, take measures to increase incoming volumes, as well as maintain a stable situation that excludes the critical influence of external and internal negative factors.

Detailed information on how the operational flow of payments is formed is contained in the ODDS reports included in the structure of quarterly and annual reporting. OCF characterizes the potential for generating additional financial traffic resulting from core activities. A positive balance indicates successful management and is an objective indicator, as significant as net profit or EBITDA.

Calculation methods

There are two methods for calculating NCF - direct and indirect. Direct is used when drawing up a report on the movement of capital and characterizes the state of working capital on the company's current accounts. In other words, the direct method is reminiscent of calculating profit using the cash method. To make it more clear, let me explain: when planning personal finances, the direct method is used - you count how much money you received and how much you spent. The remainder will be equal to your personal NCF. You can include this money in next month's expenses, put it aside for a rainy day, or invest it. If you do not intend to spend these funds, they will be called free cash flow.

The indirect method is consistent with modern financial reporting standards and allows you to obtain more detailed information about the volume of free cash flows and the structure of their cash flow items. With the indirect method, NCF is calculated based on net profit adjusted by certain amounts. We know that net profit is an indicator in monetary terms, representing the balance of funds after the fulfillment of all obligations. This amount is distributed at the discretion of the company's owners: it can be used to increase equity capital, or it can be spent on something useful or paid income to persons who have shares in the authorized capital.

Next, we will analyze each method in more detail.

Direct method for calculating NPV

To find net cash flow using the direct method, it is enough to use accounting registers:

cash book;
bank statements;
balance sheets and analyzes of cash accounts by items of movement.

Summary

P/CF is very useful for investors because there is little or no chance of cash flow manipulation. It gives an almost accurate picture of how good an investment is.

And finally, which ratio is more strict and accurate? This is the ratio of price to free cash flow P/FCF. We will study it in the next lesson.

⇐ How to make money on stocks. Lesson 6. (P/S). Using Tesla as an example How to make money on stocks: articles from a financial analyst ⇒

Estimation of NCF indicator values

Net cash flow refers to the difference between funds received and funds spent. To characterize a company or project as an attractive direction for cooperation or investment, this value must be positive. The larger it is, the higher the degree of trust in the enterprise on the part of creditors, current and potential investors.

If the NCF is negative, then the company is experiencing a shortage of funds. Cooperation, investments or loans will most likely be refused.

When performing a comparative analysis of several companies or projects, the NCF value plays an important role. Most likely, a project with a higher NCF will be preferable for any type of placement of funds - be it a loan, investment or shipment of goods with deferred payment.

How is cash flow analysis performed?

The direct method of calculating NPV allows you to assess whether the company has enough working capital. Perhaps, to do this, it is enough just to calculate the net cash flow from operating activities using the classic formula given above for the reporting period. If the NCF is negative or close to zero, this means that the company does not have enough money. In the near future, there is a high risk that there will be delays in the payment of wages, delays in paying taxes and, as a result, the likelihood of bankruptcy will increase.

As for the indirect method, it is necessary for a more detailed study of the structure of net profit. Having identified the difference between retained earnings and NPV, it is not difficult to understand where the money goes. Or why, despite a large amount of funds, the company has a low financial result based on the results of its activities. This situation is possible with long-term projects: buyers make an advance payment, and the proceeds from sales will be reflected later. In this case, competent cost management is necessary.

The net cash flow from investing activities is subject to comparison with the discounted cash flow at a certain point in time. This is necessary to calculate the payback period of investments and calculate the return on investment. Read more in the article “Discounting Cash Flows”.

Player reviews

We recently played the game “Cash Flow”! Wonderful game, so many realizations, comparisons with real life. You begin to understand your mistakes and financial illiteracy. The game was hosted by a wonderful person Artyom!!!
He explained everything very clearly and competently, I liked how he approached each player with special attention and vision of weak areas, I liked his dream!!!! “BEING A MAYOR”, Artyom, you can handle it with ease! Be you Mayor. Let me add that I came to the game from Dagestan, Makhachkala, from a ship to a ball! Just had a great time!!! Thank you Artyom!
Muslimat Hasanova

Played Cash Flow for the first time. Moreover, everyone who played on the team was also for the first time. Therefore, the fact that the coach is a player was very cool! Otherwise, we would sit and not even imagine how we could play. As they say, the game reflects your real behavior in life. I left the circle at the very first game. I realized that I have no fears, I’m not afraid to take risks.
I hope to create assets and passive income in life. What I learned from the game is that you should always remember the goal! Coach Artyom Sidorin is very cool. Didn't let me relax. The game was very dynamic. Thank you
Elena Mamaeva

I recently visited the Cash Flow game. The first time - very strong impressions of the game: you see your real picture of how you relate to money, how you evaluate new opportunities, how you enter into transactions, which transactions you refuse, how you interact with other players.
In the very first game I reached the Big Circle - and it’s cool! There are no fears, but some transactions were very risky - here I saw my point of growth. I thank the wonderful coach Artyom - you can immediately see a true professional! The game is dynamic, did not let you relax! He explained everything correctly and the feedback was very valuable! I will play again and again. And I recommend it to everyone!
Read also: Bitcoin address: how to create, where to get it and what it looks like
Ekaterina Dmitrieva

Example calculation in Excel

First, we will calculate net cash flow using the direct method. The initial data is taken from the report on the movement of DDS, compiled on an accrual basis from the beginning of the year.

Operation	Investing	Financial
CFI	620256	35	2370
CFO	382382	47	165
CF	237874	-12	2205
Cf(total)	240067

In the report, the results of cash receipts are highlighted in green, and payments are highlighted in red. The calculation results for all NCFs are marked in yellow.

Line 4400 reflects the final NCF value, which was obtained by summing lines 4100, 4200 and 4300.

In the table below, the same values are calculated using formulas in Excel.

Net cash flow is determined by the indirect method as the amount of net profit adjusted for depreciation and changes in certain lines on the balance sheet. Let's present the initial data in the table and calculate NCF using the formula:

\[ NDP = PE + A + ΔDZ + ΔTMC + ΔKZ + ΔFV + ΔAV + ΔAP + ΔDBP + ΔRBP + ΔRF, where: \]

31.12.2020	31.12.2019	Change
Net profit	17115	X
Depreciation	43	X
Accounts receivable	30569	39701	-9132
Reserves	34077	33460	617
Accounts payable	42665	48802	-6137
Financial investments	—	—	—
Advances received	412	235	177
Advances issued	1552	658	894
revenue of the future periods	—	—	—
Future expenses	5481	4337	1144
Reserve Fund	1080	1350	-270
NCF			4451

In both cases the value turned out to be positive. Now let’s do a little comparative analysis using the data from the second example - what determines the difference between net profit and NPV?

Firstly, during the reporting year, accounts receivable and payable decreased, and, consequently, the balance sheet currency. The main reasons may be:

a drop in sales and, as a consequence, a reduction in working capital;
changing the terms of contracts: reducing deferred payments, using factoring.