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What Is a Retained Cash Flow?

Alex Newth
Alex Newth

Retained cash flow is a measurement used by businesses to gauge how much money they have after the quarter or year. This money is profit, so business owners normally will use the positive retained cash flow for reinvestment purposes to help businesses grow larger. Investors will commonly look at this figure when picking companies in which they will invest, because a low or negative retained flow may mean companies are losing money and are not worth investing in. If there is a negative retained flow, then companies often have to use external funds to complete projects.

After the quarter or year — or both — a company will normally tally the amount of money it has made. One of the broadest tallies is retained cash flow, because it is expressed as the difference between money made and money spent. Outgoing money — such as operating costs and bill payments — is subtracted from money gained. Positive cash flow, or profit, is what most businesses are trying to achieve.

Man climbing a rope
Man climbing a rope

Business owners normally do not pocket all the profit, because this leaves the business with a relatively small amount of money to use for future projects. It is more common for business owners to allocate some or most of the positive retained cash flow to reinvestment. This can be used for a variety of projects, such as building a new store, hiring new personnel or making new products.

Not only is this figure useful for business owners, but investors often are interested in this value, too. When a business has a positive retained cash flow, especially a large flow, this typically means the business is successful. If the business is successful, then it is more likely that it will increase in value and investors can take advantage of this. Negative cash flow usually has the opposite effect, because investors may be worried about the business’s future if it cannot make a profit.

When there is negative retained cash flow, the business may find it difficult to complete new projects, which also may make it harder for the business to try for a better cash flow figure. If there is no money for projects, then the business often will look toward external credit to fund these projects. At the same time, this increases debt and the business will have to pay these expenses while attempting to get positive cash flow.

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