Net cash flow is the difference between all the cash a business took in and all the cash it paid out over a period. It is the same figure as the net increase or decrease in that business’s cash for the period, and the same figure as the operating, investing and financing subtotals of the statement of cash flows added together. It is one number covering a stretch of time, not the statement that reports it.
The Formula
net cash flow = cash received during the period
- cash paid during the period
= net cash provided or used by operating activities
+ net cash provided or used by investing activities
+ net cash provided or used by financing activitiesCash received is every receipt that actually landed in the period, and cash paid is every payment that actually left it, no matter when the revenue was earned or the cost incurred. The second line is the same movements sorted by what caused each one, which is why both lines produce one figure rather than two, and which receipt or payment belongs in which section is set out in cash flow statement and, for the residual class, in operating activities. One qualification sits under that second line: a business holding cash in a foreign currency reports the effect of exchange rate changes separately in the same reconciliation, so the three subtotals alone do not always account for the whole change.
What the Standard Calls It
The requirement itself never uses the phrase. What a statement of cash flows shall report for a period is net cash provided or used by operating, investing, and financing activities and the net effect of those flows on the total of cash and the related balances the standard names, which cash flow statement sets out in full (FASB Accounting Standards Update 2016-18, ASC 230-10-45-24).
Where the standard does use the words, it binds them to one class of activity rather than to the period, requiring an entity that does not present the direct method to determine and report the same amount for net cash flow from operating activities indirectly, by adjusting net income (FASB Accounting Standards Update 2016-14, ASC 230-10-45-28). That reconciliation and its adjustment list belong to the operating cash flow formula and the cash flow statement with the indirect method.
The period total gets a different name again on the face of the statement. In the standard’s illustrative indirect-method statement that line is captioned as a net increase in cash, cash equivalents and restricted cash, with the beginning-of-year and end-of-year balances directly beneath it (FASB Accounting Standards Update 2016-18, ASC 230-10-55-13). So net cash flow is the working name for a total the standard reaches by another route, and a client asking for the net cash flow line is asking for that total under a caption the standard does not use.
A Worked Example
Say a client closes a year on the amounts below. Amounts subtracted are shown in parentheses.
Cash received during the year 640,000
Cash paid during the year (605,000)
--------
Net cash flow 35,000
The same year, sorted into sections
Net cash provided by operating activities 118,000
Net cash used in investing activities (52,000)
Net cash used in financing activities (31,000)
--------
Net increase in cash 35,000
Cash at beginning of year 90,000
Cash at end of year 125,000Both routes land on the same figure, because the sections sort the same receipts and payments rather than adding anything to them.
What Net Cash Flow Is Confused With
Net cash flow is not net income, which is the accrual result for the period rather than cash that moved, so a profitable year can close with less cash than it opened with.
It is not free cash flow either, which starts from the operating subtotal and subtracts capital expenditures, as the formula for FCF works through and unlevered free cash flow extends.
Where a CPA Firm Meets the Number
Nobody keys this figure in. It falls out of the close, and the review point is whether it carries the opening cash balance to the closing one, on balances that were separately proved in bank reconciliation. A total that misses that movement means a receipt or payment landed in the wrong section, or never landed at all.
Common Questions
Subtract the cash paid out during the period from the cash taken in during the period. On a completed statement of cash flows, add the three activity subtotals instead, since both routes are the same arithmetic on the same movements.
No accounting standard defines the measure or sets a level for it, so any figure quoted as good is a judgment rather than a rule. A negative period is not automatically a bad one either, because a business that bought equipment or repaid a loan can close down on cash and still be in better shape, which is why the section that produced the movement says more than the sign on the total.
No. Profit counts revenue when it is earned and costs when they are incurred, while this figure counts only cash that moved, so the two part company whenever something is billed but not collected, incurred but not paid, or charged without any cash leaving. The reconciliation from net income to the operating subtotal is where that difference becomes visible line by line.
Cash in less cash out, the same subtraction, with the result called a net cash inflow when it is positive and a net cash outflow when it is negative. Applied to one activity section or one project rather than to the whole business, it is that section’s or that project’s own receipts less its own payments.
Accountably places trained offshore accountants and tax preparers inside US CPA and EA firms, and a firm can put its own close and statement work through a trial task before a client engagement depends on it.
