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Cash flow is a crucial part of your company's financial success. So, when reviewing how well your business is performing, looking at the retained cash flow can help you get an understanding of the increase or decrease of cash in your company over time. This is why we've compiled this short guide to how to calculate retained cash flow.
Retained cash flow - explained
Retained cash flow refers to the net change in cash and cash equivalents by the end of a financial period. It can also be described as the difference between cash flows that are incoming and outgoing. This is cash that is left after all expenses and debt obligations have been fully paid, including cash returned to capital suppliers and dividends. Your business is likely to mostly have a positive retained cash flow figure. This means the business is healthy. If the business is struggling, this can lead to a negative retained cash flow figure. This would mean your company would likely have difficulty achieving growth over the coming months.
Calculating retained cash flow
When calculating your company's retained cash flow, you need to locate cash flow statements from the previous two financial periods. You then identify the total cash flow figure on the statements and then subtract dividends and expenses from each of those figures. In the last step, you determine the difference between the figures in each previous cash flow statement to arrive at your business's retained cash flow.
Advantages of calculating the retained cash flow
Knowing your company's retained cash flow can help understand the financial health of your organization and the efficiency of your budgeting. You can find out the cash available for investment into growth or how efficiently your business uses expenses.
Improving your business's retained cash flow
Should you be looking to improve the figure, your focus should be on increasing activities that generate cash flow. This can be helped by streamlining your payment process, eg switching to direct debits, to avoid delays. Also, you could look at improving your debt management - having a good accounts receivable system can improve financial health.
