How are your finances really doing? Find out by calculating your net cash position

What is net cash flow for a company, how can it be calculated and how can it be improved?

This article looks at useful accounting concepts such as the functional balance sheet, working capital and working capital requirements, to help you understand cash management and its impact on a company's development and financial health.

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What is net free cash flow?

Net cash defines the money that can be mobilised at a given moment, in other words cash on hand.

More precisely, it is the difference between cash at bank and short-term bank debt.

It is an accounting and financial management indicator closely linked to :

• overall net working capital (available reserves),
• working capital requirements (forecast expenditure),
  calculated during the preparation of the functional balance sheet, derived from the accounting balance sheet.

Why calculate it?

Knowing your net cash position is essential for your business at several key points:

• Before you set up or take over a business, to establish the financial forecasts in your business plan and ensure that your project is viable.
  
  
• Throughout the life of the business, to draw up financial forecasts so that you can adjust your strategy and objectives. Regular monitoring and analysis of net cash flow :
  • enables you to measure the company's financial equilibrium in the short term;
  • demonstrate good management if this balance is sustainable;
  • help anticipate investments and draw up budget forecasts.

💡 It's up to you to decide how often you want to calculate your net cash position, depending on fluctuations:

• daily
• weekly
• monthly
• quarterly
• annually, at the end of an accounting period.

How is net cash calculated?

Net cash: formula

There is not one, but two ways of calculating net cash flow.

#1 Top of balance sheet approach

Here is the formula to apply 👉

💡 Note:

• Overall net working capital(ENWC) represents the investment part of the functional balance sheet. It is the difference, and therefore the surplus, between stable resources and stable uses.
  
  
• Working capital requirements (WCR) represent the operating part of the balance sheet. It is the difference between current assets (short-term receivables and inventories) and current liabilities (short-term debts).

#2 Approach from the bottom of the balance sheet

Here is the formula to apply 👉

💡 Note:

• Cash and cash equivalents are also referred to as cash assets or positive cash, debts cash liabilities or negative cash.
  
  
• Positive cash includes bank balances as well as marketable securities, such as shares in the portfolio.

Example of calculating net cash

Let's take the following balance sheet as an example:

Assets		Liabilities
Fixed assets	1 000	Shareholders' equity	500
Inventories	100	Financial debt	600
Trade receivables	200	Trade payables	400
Cash at bank and in hand	350	Bank overdrafts	150
Total	1650	Total	1650

Compta Facile

👉 At the top of the balance sheet: (500 + 600 - 1 000) - (100 + 200 - 400) = 100 - (-100) = 200

👉 At the bottom of the balance sheet: 350 - 150 = 200

The net cash position is therefore €200.

💡 Thanks to the use of specialised software, long, tedious calculations and error-prone manual operations are a thing of the past. For example, Sellsy Cash Management synchronises your banking and invoicing data to give you real-time visibility of your net available cash. You can also take advantage of reliable forecasts to anticipate future cash flows and make the best business decisions.

How do you interpret net cash flow?

Positive net cash position: significance

A positive net cash position means that your company has sufficient resources to meet its short-term needs, for example to pay off a debt quickly.

A sign of good management, a positive net cash position should nevertheless be put into perspective:

• Is it stable over the medium term?
• Does it indicate a halt in the investment needed to develop the business?

If you have a positive net cash position over the long term, you may want to consider using this money wisely, to renew ageing equipment, hire new staff or make financial investments, for example.

Zero net cash position: significance

If the balance is right, the company's financing needs are covered in the short term.

But unexpected expenditure represents a risk for the company, which has little room for manoeuvre.

Negative net cash position: significance

If cash flow is negative, the company is in deficit.

To avoid disaster, avoid bank overdrafts or get into debt with its suppliers, it must resort to short-term financing, such as bank loans.

Whatever the case, this situation cannot be allowed to continue, otherwise the very existence of the company will be jeopardised.

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How can you control your net cash position?

In the event of negative or zero cash flow, there are two main avenues open to you.

Improve overall net working capital

You can improve your overall net working capital by, for example :

• increase your equity, your capital, with new shareholders ;
• review the company's investment policy;
• increase long-term debt, by taking out a bank loan;
• reduce fixed assets, etc.

Controlling working capital requirements

Optimising your WCR involves, for example, better management of :

• customer payment times, through credit management,
• supplier payment times (short-term debts),
• inventories.

In conclusion :

• achieving a positive net cash position means striking the right balance between NFFR and WCR;
• good cash management is essential if you are to invest and grow your business.