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?

In this article, you'll find 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 available cash defines the amount of cash that can be mobilized at a given moment, in other words, cash on hand at sight.

More precisely, it corresponds to the difference between cash at bank and short-term bank debts.

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

• overall net working capital (available reserves),
• working capital requirements (anticipated 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, and at several key points:

• Before starting up or taking over a business, to establish the financial forecasts in your business plan and ensure the viability of your project.
  
  
• Throughout the life of the company, to draw up financial forecasts and adjust 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 choose 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 to calculate net cash flow?

Net cash: formula

There are not one, but two ways to calculate net cash flow.

#1 Top-of-balance sheet approach

Here's the formula to apply 👉

💡 Note:

• Overall net working capital(ONWC) represents the investment portion of the functional balance sheet. It is the difference, and therefore the surplus, between stable resources and stable uses.
  
  
• Working capital requirement (WCR) represents 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's the formula to apply 👉

💡 Note:

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

Example of net cash calculation

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

Assets		Liabilities
Fixed assets	1 000	Shareholders' equity	500
Inventories	100	Financial liabilities	600
Accounts receivable	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

👉 Bottom line: 350 - 150 = 200

Net cash therefore amounts to €200.

💡 Thanks to the use of specialized software, long, tedious calculations and error-prone manual operations are a thing of the past. For example, Sellsy Gestion de trésorerie synchronizes your banking and invoicing data, providing you with real-time visibility of your available net cash. You can also take advantage of reliable forecasts to anticipate future cash flow, and make the best business decisions.

How to interpret net cash?

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, positive net cash flow needs to be put into perspective:

• Is it stable over the medium term?
• Does it indicate a halt in the investments necessary for the company's development?

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

Zero net cash position: significance

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

But unexpected expenses represent a risk for the company, which has little room for manoeuvre.

Negative net cash position: significance

Negative net cash means a loss.

To avoid disaster, bank overdrafts or supplier debts, it must resort to short-term financing, such as bank loans.

Whatever the case, this situation cannot be allowed to continue, as otherwise the very existence of the company is jeopardized.

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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

Optimizing your working capital requirement involves, for example, better management of :

• customer payment deadlines, thanks to credit management,
• supplier payment terms (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 fundamental to investment and business development.