What is Net Cash Flow From Operations?

net cash flow from operationsNet Cash Flow From Operations – What is it?

Net cash flow from operations, also known as operating cash flow, is a financial metric that measures the amount of cash generated or used by a company’s core business operations during a specific period of time.

Lenders use it because it provides insight into the company’s ability to generate cash from its regular business activities, excluding financing and investing activities. It is a metric commonly used by high street banks to assess whether a business can generate cash to meet its obligations.

To calculate the net cash flow from operations, you typically start with the company’s net income (profit or loss) from the P&L and then adjust for non-cash items (such as depreciation and amortisation) and changes in working capital accounts (such as debtors, creditors and stock) that affect cash flow.

The formula is as follows:

Net Cash Flow from Operations = Net Income + Non-Cash Expenses (e.g., depreciation and amortisation) + Changes in Working Capital

Why Do Lenders Do This?

Positive operating cash flow indicates that the company is generating enough cash from its operations to cover its day-to-day expenses and investments. It suggests that the company is in a healthier financial position to meet its obligations and can afford to meet any new finance commitments.

On the other hand, negative operating cash flow implies that the company is not generating enough cash from its core operations to sustain its activities. In such cases, the company might need to rely on external financing or use cash reserves to meet its financial needs.

This matters because it is not about profit or loss. A business making a profit can be generating no cash whilst a company running at a loss can be generating cash. Financials are never straightforward.

An example of this is a company that sells on 90 day payment terms but only gets 7 day terms from core suppliers. They make a healthy profit but are constantly needing to finance the 83 day gap between these two dates, the more the company grows the bigger the issue gets. As a guide, a domiciliary care business working with the NHS is an example here with having to pay staff weekly but only getting paid by the NHS every 90 days. A company in this position that is growing can be referred to as ‘overtrading‘, which is another topic entirely.

Banks, who tend to like these ratios, will look at this metric to work out affordability of any new finance now, and will look at what other cash flow finance may be required going forward, in this regard it is a good metric to look at if the bank you are working with explains it to you and allows you to benefit from it.

That rarely happens, so hopefully this article sheds a little light on things!

If you want to know your finance options or need a hand in getting that growth finance in place then get in touch and let’s talk.

By Dave Farmer


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