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What is Net Cash Flow?

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  • Written By: Jim B.
  • Edited By: Melissa Wiley
  • Last Modified Date: 23 March 2018
  • Copyright Protected:
    2003-2018
    Conjecture Corporation
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Net cash flow is a measure of a company's financial strength that refers to the amount of cash a company has on hand at a particular time. This amount is calculated by taking the amount of cash receipts, or inflow, in a period of time and subtracting from it the cash payments, or outflow, during that same time. There is often a difference between the net cash flow of a business and the income it has reported over the same time period. Such a discrepancy can be caused by accounting principles like depreciation and allocated costs that show up on income statements but don't represent actual cash to a business or by the timing of certain payments or receipts.

Over the course of its existence, a business may have several occasions when quick and decisive action is needed, whether to confront a problem or seize a good opportunity. The businesses that have plenty of cash at their disposal are better equipped to rise to these occasions than those without such excess cash. Since this is the case, net cash flow is an important barometer in measuring the financial strength of a particular company.

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Simply put, net cash flow is the amount of cash received minus the amount of cash paid out in a given time. This does not take into account any wealth the company might have accrued in other time periods. Most publicly traded businesses publish a cash flow statement, usually both quarterly and annually, to let investors know how much operational cash is available for the business to use.

Although they both measure a company's financial strength, there are often disparities between the net cash flow amount and the amount of income reported by a company on an income statement. One of the reasons for this is that certain accounting principles show up on income statements and balance sheets, but have no bearing on available cash. For example, depreciation of certain assets shows up as a credit on balance sheets, but does not actually produce cash for the company.

Another reason that these two amounts may contradict each other is timing. For example, credit card purchases in a store would show up on the store's income statement as a source of income in the month they were made, but the actual cash might not be received by the store until a few months had passed. In a case such as that, the store's income statement for the month of those purchases might reflect higher income than the actual net cash flow received.

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