Cashflow is the lifeblood of any businessIf the speed you collect cash owing to you is slower than the rate you pay it out to your suppliers, you are going to find it increasingly difficult to find the money to pay your suppliers.  Unless this is rectified, you stand a good chance of going bust. Positive cashflow also gives you money to fund your business’s growth from your own operations without borrowing.  Knowing your cashflow allows you to plan affordable growth. This article introduces Net Cashflow and Marginal Cashflow / Current Ratio concepts for measuring Cashflow health.  Periodically measuring your Cashflow situation can make you aware of any looming problems in time to rectify them. Yellow and Blue Belt level.

Net Cashflow

Net Cashflow is the difference between closing Cashflow indicators at the end of e.g. a month, quarter or year and the opening values of the same indicators at the start of the period.  The difference is the “Net” amount you have available to fund growth.

That is, it is the closing balance minus the opening balance.  We are hoping for a positive number here meaning there is more cash at the end of the period.

Why Study Net Cashflow

The Net Cashflow is a figure that we want to measure on a reasonably regular basis so that we can be sure that the business is healthy.

Elsewhere we discuss how Cashflow:

Go to the Menu: Cashflow

One of the success secrets of Dell Computers and Amazon is that they have funded their growth from positive Cashflow.  Something to ponder for your own business!

Measuring Net Cashflow

It is quite easy to measure this figure.  We simply take the total of the short-term debt (which includes things like Bank Overdraft, Credit Cards and other debt that we normally pay back quite quickly) plus the long-term debt (things like Bank Loans that are paid back over a period).

At the end of the period – which could be as little as monthly, and certainly should be quarterly – we do the same thing again.  The net cashflow is the difference between the opening net debt and the closing net debt.

Let us have a look at a simple example:

Net Debt

   Opening Short Term Debt $25,000   Closing Short Term Debt$37,500
Opening Long Term Debt $100,000Closing Long Term Debt$90,000
 Total Opening$125,000 Total Closing $127,500

Net cashflow is -$2,500 (that is, it is a minus value)

Very quickly we have seen that our Cash situation has worsened and that we have less money at the end of the period than when we started.  It means we have a negative cashflow.

If this trend continues, we will very clearly run out of money at some point in the future.

A negative Cashflow means not only bells and sirens by way of an alert but it also means that you will not be able to grow from internal funding within the organisation.

Why don’t you pause at this point and do this analysis on your own business over a period.  Perhaps the fastest way to do it is to get this data from the last 2 year’s Financial Statements prepared by your professional Accountant and see whether the business cashflow has improved between those 2 years.

Measuring Marginal Cashflow

Another possibly useful statistic for managing your Cashflow is the “Marginal Cashflow” sometimes also referred to as the “Current Ratio”.

This ratio calculates the amount of cash that has been retained by the business as Working Capital and compares it to the amount of cash that the business produces at the Gross Profit level.  The idea is to check if the calculation is positive, meaning that you should have enough to cover your debts.

Working Capital can be calculated by adding together Accounts Receivable plus Inventory and subtracting Accounts Payable.


Accounts Receivable $1,000
Inventory + $10,000
Total = $11,000
Less Accounts Payable – $5,000
Working Capital = $6,000.

In this business, the Working Capital Ratio is $6,000 divided by $5,000 which equals 1.2 Current Ratio.

You read this that we have $1.20 in liquid/current assets to pay each $1.00 of current debt.

It is possible for this to be negative meaning that expenses to be paid exceed the money available; not a good prospect.

Those of you who have read about Inventory Management in 12Faces might realise that this ratio can suffer from having inventory included.  It is easy to have more inventory than you really need tying up your available capital.  Theoretically, you can sell this inventory to pay your debts but practice might turn out differently.

We are not great fans of this measurement for that reason.

Other useful Articles on Cashflow

12Faces considers a thorough grasp of your Cashflow picture to be vital to the health of your business.

For this reason, there are several articles on various aspects of Cashflow that will be valuable further reading.

We have collected these in the Cashflow Menu

Another cashflow measurement technique is discussed in the article: How to Benefit from Cash Conversion Cycle (CCC)

Depending on your business, and on how useful you feel these two measurements are, you can consider putting them on your business “Dashboard” to keep a watchful eye on your business’ health.

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