Retained cash flow is something that every business should work on calculating. Why? We’re going to explain the reason you need to work on learning the retained cash flow calculation, how to calculate this key metric and even the advantages of it for your business.
Before going any further, it’s important to explain the concept of retained cash flow (RCP). RCP, at its most basic form, is the measurement of the change during a specific period in:
RCP shows you the difference in the cash coming in and going out during the period. However, this is not the same thing as cash flow. Instead, it is the actual remaining cash that you have after:
Additionally, RCP is an indicator of cash that you have left to reinvest in your future growth. If you’ve heard the term retained earnings before, you may be wondering what the difference is between the two.
Retained earnings cash flow and retained earnings are very different.
Retained earnings do not involve cash flow. Instead, it’s a measurement of your profit and losses since a certain date. Profits that you make but do not pay out in dividends and expenses are retained earnings. Let's look at an example:
So, for the point of this article, you will not be worrying about your retained earnings at all. You’re also unlikely to find your retained earnings on cash flow statements.
Now that you know the difference between retained earning cash flow and retained earnings, let’s take a look at how you can begin using this metric in your own business.
RCP is used to help a company measure its financial status. You can use RCP to gain deeper insight into:
RCP is money that is often put back into the business through reinvesting. Using the example above, the business may have $6 million to use for:
If RCP is negative or minimal, the money may also be retained and not reinvested. Instead, the cash may be kept and used to satisfy debts or keep operations going.
Finally, let’s take a look at the retained cash flow calculation so that you can begin using this metric in your own business.
Using the basic example above, you can start to figure out how to calculate RCP. However, let’s walk through the retained cash flow formula and go through the step-by-step process that you can use to begin your calculations.
You may have a retained earnings adjustment on cash flow statement, but if you do not, you can begin following the steps below:
You can also use software to help you calculate the cash flow and RCP much easier. There are also advantages to calculating this type of cash flow in your business.
Cash flow in business is always important, but we truly narrow down cash when we look at RCP. The reason to begin using RCP is for:
If you know how much RCP you have, there’s always an opportunity to improve operations. Perhaps you need to cut dividend payments or you need to find ways to keep more cash in your business’ coffers.
For example, you may need to start paying using credit or negotiate better terms with suppliers.
With that said, paying in cash means that you do not have interest payments and can retain higher RCP over the long term. If you have an abundance of cash to pay cash for expenses, it’s often in the best interest of the business so long as your cash flow remains healthy.
Knowing the retained cash flow calculation means that now you can take the time to improve this key metric. A few of the ways that you can begin to improve RCP include:
Of course, many large businesses that pay cash dividends to their stockholders will also decide to stop dividends or lower payouts in times of low RCP. You may need to make this same decision in your business, but you will need to consider cutting dividend payouts greatly.
Every business owner should try and find ways to handle their cash flow better.
Handling cash flow is an art, and it takes a lot of crunching numbers, knowing your customer’s payment habits and also the steps to take to improve cash flow. First and foremost, you should use a platform like Cash Flow Frog to help you rapidly create cash flow statements.
When you have access to the data available about your cash flow, you’ll have an easier time:
Handling cash flow goes well beyond just reviewing the numbers and accepting the figure on the screen. Internal accountants and decision-makers should use the information provided in tools like
Cash Flow Frog to:
A few of the ways that you can work on your overall cash flow are:
If you’ve done all of this, now it’s time to start making money using the industry’s state-of-the-art cash flow solution.
The best cash flow forecasting software can help you make money. How? When you have full control of your cash flow, you can make smarter business decisions. For example, if you know what your RCP is, you can decide to:
In all of these scenarios, RCP will help you grow and expand your business. As a well-managed business grows, RCP will lead to more opportunities and money.
Cash Flow Frog provides world-class insight into your business’s operations with:
Through Cash Flow Frog, many businesses will forecast their cash flow for future periods and then calculate RCP potential. Knowing how much cash you have to invest and potential cash issues will help you maintain financial health in the long term.
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