The net cash flow formula is: net cash flow = total cash received − total cash paid out over a period. Equivalently, it is closing cash − opening cash, or the sum of net cash from operating, investing and financing activities, the three headings FRS 102 uses in a statement of cash flows. A positive figure means cash rose in the period; a negative figure means it fell.
Three versions of the same formula
All three give the same answer for the same period. Which one you use depends on the information you have:
- Receipts and payments. Net cash flow = cash inflows − cash outflows. Use this for a simple cash book or a weekly forecast;
- Balance movement. Net cash flow = closing cash and cash equivalents − opening cash and cash equivalents. Use this as a quick check against bank balances;
- By activity. Net cash flow = net cash from operating activities + net cash from investing activities + net cash from financing activities. This is the form used in statutory accounts and the most useful for analysis.
"Cash" here means cash and cash equivalents. FRS 102 defines cash equivalents as short-term, highly liquid investments readily convertible to known amounts of cash with an insignificant risk of changes in value, normally with a maturity of three months or less from acquisition. An overdraft repayable on demand that forms part of day-to-day cash management counts as part of cash; other overdrafts are treated as borrowings.
The three activities
FRS 102 paragraph 7.3 requires cash flows to be classified by operating, investing and financing activities:
- Operating activities. The principal revenue-producing activities: cash from customers, payments to suppliers and employees, and normally tax;
- Investing activities. Buying and selling long-term assets and investments, such as equipment, property and shares in other companies;
- Financing activities. Changes in equity and borrowings: share issues, new loans, loan repayments, the capital element of lease payments and, if the company chooses, dividends paid.
Interest paid can be shown as operating or financing, and dividends paid as financing or operating, provided the choice is applied consistently from year to year.
Worked example
A small company has £40,000 in the bank at the start of the year. During the year:
| Item | Cash in (out) |
|---|---|
| Receipts from customers | £520,000 |
| Payments to suppliers and staff | (£455,000) |
| Corporation tax paid | (£15,000) |
| Net cash from operating activities | £50,000 |
| Purchase of a van | (£30,000) |
| Net cash from investing activities | (£30,000) |
| New bank loan | £25,000 |
| Loan repayments | (£8,000) |
| Dividends paid | (£20,000) |
| Net cash from financing activities | (£3,000) |
| Net cash flow | £17,000 |
Net cash flow is £50,000 − £30,000 − £3,000 = £17,000, so closing cash is £40,000 + £17,000 = £57,000. As a check, total inflows of £545,000 less total outflows of £528,000 also give £17,000.
The breakdown says more than the total. The business generated £50,000 from trading, spent £30,000 on a van and borrowed £25,000, part of which effectively funded the dividends. A positive total built on new borrowing is weaker than the same total built on trading.
Starting from profit: the indirect method
Most businesses do not have totals of cash receipts and payments to hand, so they work from profit. FRS 102 calls this the indirect method: profit is adjusted for changes in inventories, receivables and payables, for non-cash items such as depreciation and provisions, and for items whose cash effect is investing or financing. In outline:
Operating cash flow = profit + depreciation and other non-cash charges − increase in stock − increase in debtors + increase in creditors − tax paid.
If the company in the example made £45,000 of profit before tax, charged £6,000 of depreciation and saw debtors rise by £8,000 and creditors rise by £22,000, operating cash flow before tax would be £45,000 + £6,000 − £8,000 + £22,000 = £65,000, and after £15,000 of tax, £50,000. That agrees with the direct figure above. Our guide to the cash flow statement covers the full FRS 102 presentation.
Net cash flow is not profit
Profit is measured on an accruals basis; cash flow is not. The usual causes of a gap are:
- Timing of sales. Sales on credit increase profit before the cash arrives;
- Capital spending. A £30,000 van reduces cash at once but reaches profit only through depreciation;
- Borrowing. Loan proceeds increase cash but are not income, and capital repayments reduce cash but are not an expense;
- Tax timing. Companies with taxable profits of up to £1.5 million pay corporation tax 9 months and 1 day after the end of the accounting period, and VAT is usually due one calendar month and 7 days after the end of each VAT period.
Do you have to report it?
Companies preparing full FRS 102 accounts must normally include a statement of cash flows, but FRS 102 paragraph 7.1B says a small entity is not required to, and paragraph 1.12(b) lets a qualifying subsidiary included in group accounts take an exemption. For financial years beginning on or after 6 April 2025 a company is generally small if it meets at least two of turnover not more than £15 million, balance sheet total not more than £7.5 million and no more than 50 employees. Even where it is not required, a monthly net cash flow figure, split by activity, is the simplest early warning a business can have.
The definitions come from FRS 102 Section 7, published by the Financial Reporting Council; the small company limits from section 382 of the Companies Act 2006; and the payment dates from GOV.UK's guidance on paying Corporation Tax and VAT Returns. For forecasting, see our guide to cash flow monitoring.
If you want net cash flow reported monthly alongside profit, our management accounts service does exactly that, and our financial modelling team can build a rolling cash forecast.