KPI of the Day – Accounting: $ Net cash flow
Measures the remaining balance after deducting cash outflows from cash inflows.
To indicate the financial health of the company and how well the company manages its money.
$ Net cash flow reflects the actual money the business has to operate with, unlike the profit, which reflects the difference between revenues and costs.
Managing cash is a matter of mathematics, statistics and financial forecasting. Moreover, it requires further investigation into the realm of economics, as it is a key element of an organization’s financial solvency, stability and profitability.
In terms of business development, cash management is a primary concern for small and medium sized businesses because they have to deal with significantly high, up-front costs while suffering from restricted access to financing opportunities.
Cash management at multinational level depends on the strength of the cash flow, on the value of the balance sheet and the level of exposure within the cash cycle. Within a corporate cash management process, the operating cash cycle is closely monitored and technological support is mandatory. A comprehensive financial database ensures the flow of information throughout the organization, and measures unforeseen changes in the balances that it monitors.
This KPI is reflected in the Cash Flow Statement. The period of measurement depends on the company’s activity specific elements, such as days in accounts receivable or days in accounts payable. For sound cash management, some businesses monitor the cash flow even on a weekly basis. If $ Net cash flow comes from financing or investment activities, it is not relevant for analyzing the company performance in its core business activity.
Results concerning this indicator may vary depending on the company’s size, intensity of operations and industry profile. Businesses in manufacturing, retail or hospitality (restaurants) are very cash-intensive, striving for money for fresh inventory and paying staff and suppliers even on a daily basis.
Some recommended practices on effectively managing inbound and outbound company cash include the following:
- Enhancing the importance of cash flow reporting and cash flow monitoring within the process of cash flow management;
- The use of cash flow accounting to record and analyze incoming and outgoing cash;
- Cash flow management integration;
- Financial infrastructure set-up and optimization;
- Short-term and medium-term forecast for financial planning.
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