Simply put, the net cash flow is all the money coming in minus all the money going out. This metric is usually surfaced on your statement of cash flow.
The statement of cash flow summarizes all of the money entering and exiting the company. This is used to calculate the net cash flow. It is one of the three main financial statements with the balance sheet and income statement. While the balance sheet summarizes the assets, liabilities, and owner’s equity of the company at a moment in time, the income statement summarizes the revenue and expenses over a specified period of time to calculate the net profit of the company.
Similar to the income statement, the statement of cash flow is presented for a period of time. It separates the cash flows into those from operating activities, financial activities, and investing activities. More fundamentally, they are divided into inflows and outflows.
Your net cash flow is a particularly important metric to measure in a SaaS because it doesn’t always align with when revenue enters the company or expenses exit the company.
Baremetrics makes it easy to collect and visualize all of your cash flows. When you have many clients, some are subscribed on an annual basis while others monthly, with multiple tiers and various add-ons, it can be difficult to calculate your MRR, ARR, LTV, and so much more. Thankfully, there is Baremetrics to do all of this for you.
You can sign up for a Free Baremetrics Trial to start tracking your cash flow in real-time.
How do you calculate net cash flow?
There are two main equations for calculating net cash flow. They combine into a single, Voltron-esque equation that summarizes the entire statement of cash flows.
The first two net cash flow equations are:
(1) Net Cash Flow = Net Cash Flow from Operating Activities + Net Cash Flow from Financial Activities + Net Cash Flow from Investing Activities
(2) Net Cash Flow = Total Cash Inflows – Total Cash Outflows
The first one is a summary of the different types of cash flow, which we will look at in the next section, while the second simply says that money comes and goes, and so we need to watch how much is going relative to how much is coming.
These combine into one big equation that is essentially the statement of cash flows:
(3) Net Cash Flow = (Cash Inflows from Operating Activities – Cash Outflows from Operating Activities) + (Cash Inflows from Financial Activities – Cash Outflows from Financial Activities) + (Cash Inflows from Investing Activities – Cash Outflows from Investing Activities)
To calculate your net cash flow, regardless of the equation chosen, you will need to know your cash inflows and cash outflows. Let’s look at some examples.
Cash inflows: Customer payments, sale of goods or services, loan receipts, cash dividends, interest earned, fixed asset sales, supplier and vendor refunds, grants, third-party funding, lawsuit settlements, insurance claims, equipment sales, and property sales.
Cash outflows: Payroll, supplier and vendor payments, taxes, fees, fines, licenses, interest paid, fuel and transportation costs, rent, utilities, marketing and advertising spend, debt payments, equity investment, stock buybacks, shareholder payout, and property purchase.
What are the three types of cash flow activities?
Net cash flow is comprised of three categories:
Operating activities: Operating activities generate cash flows from your business’s general operations, including expenditures for administrative expenses and receipts from customers.
Financial activities: Financial activities generate cash flows through bonds, debt, and stocks, for example cash used to pay off debt or cash dispersed as dividends.
Investing activities: Investing activities generate cash flows related to major purchases or sales that change the long-term structure of the company, for example the purchase of new equipment or the sale of a platform outside of your core business plan. (Check out this article about how Baremetrics sold Intros for $100,000.)
Importantly, there are cash inflows and cash outflows with all three categories.
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What are the other types of cash flow?
While net cash flow is the most common type of cash flow to discuss, some of the other forms of cash flow include operating cash flow, free cash flow, and free cash flow to equity.
Operating Cash Flow: Operating cash flow indicates the amount of cash being generated by a business from its normal operating activities. One of the major differences between operating cash flow and net cash flow is that operating cash flow does not include capital expenditures (the investments made to buy and maintain fixed assets).
Note that this is the only one of these three other cash flow types that is a GAAP (Generally Accepted Accounting Principles)-approved metric.
Free Cash Flow: Free cash flow is the operating cash flow minus capital expenditures. It indicates the cash that is “free” to be spent by management.
Free Cash Flow to Equity: Free cash flow to equity is the free cash flow plus net debt issued (or minus net debt repayment).
Why is net cash flow important?
While the current ratio and quick ratio are measures of your company’s liquidity, the net cash flow is an indication of how your liquidity is changing over time. Since cash troubles usually precede other financial troubles, keeping track of your cash position is extremely important to ensuring you remain a viable and agile company.
Indeed, there are two main indicators of whether a business will be able to survive: profitability and cash flow. As counterintuitive as it may be, a profitable company without sufficient cash flow is destined to fail, even though a not particularly profitable company with a strong positive cash flow can survive long enough to turn around its profitability.
How does this happen? Well, one of the major causes of a profitable company not maintaining a good cash flow is a failure to timely collect on accounts receivable. Accounts receivable are all the revenue you have earned from your clients but not yet collected. Unfortunately, not all accounts receivable are collectable, and the longer you wait, the less likely it is that you will collect that money owed.
One of the major reasons this happens is through credit card failures. Dunning is an immensely important part of any company, and stopping involuntary churn is one of the best things you can do for your company today. It can stop a momentary cash flow issue from ruining the long-term profitability of your company. Up to 9% of your MRR is at risk from failed payments. That’s where Baremetrics comes in.
Baremetrics Recover offers you an exceptional dunning tool to make sure you collect your accounts receivable.
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What are the limitations of net cash flow?
No individual business metric is perfect, and that includes net cash flow. The general consensus in business is “having more cash on hand is better”, but that is not always the case.
For example, if a company has a sudden large positive net cash flow because they took on a new debt, that might not be the best indicator of good financial health. While debt isn’t bad per se, the reason the company has taken on debt and the cost of that debt are important to know when gauging whether this cash inflow will be good for the business or a leading signal of its imminent demise.
Conversely, a large investment activities outflow may increase the capacity of a company to produce a product and be a sign of healthy growth.
Other cash outflows that might be signs of a healthy company include an increased dividend payment or the early repayment of a debt with unfavorable terms.
Although a company’s cash flow position is important, it cannot be used to evaluate the overall health of a company in a bubble. Especially for a SaaS company, there are many other metrics that also need to be taken into consideration, such as MRR (Monthly Recurring Revenue), ARR (Annual Recurring Revenue), LTV (Customer Lifetime Value), CAC (Customer Acquisition Cost), and churn.
Use Baremetrics to measure and forecast your net cash flow
It is difficult to calculate your company’s net cash flow. You probably use a payment gateway—or several gateways depending on the nature of your business and/or the customers you target—and searching through all the data to confirm how much money has come in can be hard.
Beyond difficult, it is time consuming and distracts you from other duties. This is compounded if you have multiple plan tiers, some customers paying monthly while others paying annually, as well as a variety of add-ons to boost your expansion MRR.
Even before you get into the task of forecasting your revenue growth or net cash flow into the future, you need a platform that will bring in all that data from across your different platforms and present it in an easy-to-read way.
Baremetrics monitors your SaaS quick ratio, computing everything from your company’s MRR as shown by your membership or subscription payments/upgrades to the monthly churn rate. It even keeps track of your payments so you can know your cash flow. Integrating this innovative tool can make financial analysis seamless for your SaaS company, and you can start a free trial today.
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