Last editedApr 20202 min read
When you’re trying to determine the financial health of a company, cash flow is often a great metric to look at. Doing a retained cash flow calculation can help you understand the net increase/decrease in cash from one period to another, giving you the tools you need to judge your company’s financial stability and potential for growth. Find out more about how to calculate retained cash flow, right here.
What is retained cash flow?
Retained cash flow (RCP) is essentially a measure of the net change in cash and cash equivalents by the end of a financial period. In short, it’s the difference between incoming and outgoing cash flows. It’s important to remember that retained cash flow covers the amount of cash left to the business after all expenses and debt obligations have been fully paid, including cash returned to capital suppliers and dividends.
What is a good retained cash flow?
In most cases, your business will have a positive retained cash flow, indicating that the company’s financial position is healthy, and the business is primed for growth. However, if the business is experiencing financial difficulty, the retained cash flow will be minimal or in some cases, negative. This would mean that the cash and cash equivalents within the company – after accounting for expenses and debt obligations – are depleted, and the business will have difficulty achieving growth over the coming months.
What is the retained cash flow formula?
Learning how to calculate retained cash flow is very simple:
First off, you need to locate your company’s cash flow statements from the previous two financial periods.
Then, find the figure for total cash flow on the statements.
Next, you need to subtract dividends and expenses from each statement’s total cash flow figure.
Finally, determine the difference between the figures, and you’ll have completed your retained cash flow calculation.
For example, if your most recent cash flow statement has a figure of $100,000 after paying out dividends and expenses, and the previous cash flow statement had a figure of $80,000, the difference would work out to $20,000. This means that you have $20,000 in retained cash flow.
Why is understanding retained cash flow important?
Retained cash flow can be an excellent metric for gauging the financial health of a business, providing you with insight into the efficiency of your budget. It can help you find out how much cash will be available for reinvestment in growth and whether your business’s expenses need to be trimmed to improve future revenues. If your company has a positive retained cash flow, you can use the cash to finance net present value (NPV) projects and boost the business’s growth trajectory.
Tips for improving your retained cash flow
If you’ve done a retained cash flow calculation and you’re not happy with the result, there are plenty of strategies you can use to boost your incoming cash flow and improve your overall retained cash flow figure. Put simply, you need to focus on activities that are likely to strengthen your cash flow. One easy way to do this is to make it easier to get paid. Taking payment with Direct Debit through GoCardless can ensure that you receive payment automatically when it’s due.
Another key strategy is to focus your efforts on debt management. Optimising accounts receivable can help you reduce the amount of cash stuck on your books. Automate the debt collection process wherever possible and consider offering incentives for customers who pay early. It’s also a good idea to review your pricing strategy and check whether there are any inefficiencies or ways to raise revenues while reducing expenses.
We can help
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