How to Calculate Retained Cash Flow (RCP)

When it comes to finance, how do we know if a company is ‘healthy’ or not?

There are several possible metrics to consider, but one of the most useful is assessing the business’ cash flow, often referred to as a retained cash flow (RCP) calculation. This helps you to understand the net increase/decrease in your cash from one period to another and, as a result, your financial stability and any potential for growth.

Here we explain how to calculate your retained cash flow and, if your not pleased with the result, how you can improve the situation.

What is retained cash flow?

Retained cash flow (RCP) is a measure of the net change in cash and cash equivalents by the end of a financial period, i.e., the difference between incoming and outgoing cash after all debts have been paid and expenses deducted.  

What is a healthy retained cash flow?

If your business’ retained cash flow is positive, this suggests that it is financially healthy and could be ready for growth.

Minimal or negative retained cash flow would suggest that the company may be experiencing financial difficulties or is in a precarious position, and growth is unlikely in the foreseeable future.

Calculating retained cash flow

To calculate your retained cash flow you will need your business’ cash flow statements that cover the previous two financial periods.

1. Look for the ‘total cash flow’ figure on the statements.
2. Subtract expenses and dividends from each statement’s figure.
3. The difference between the two figures is your retained cash flow calculation.

For example:

• Statement 1’s cash flow figure = £200,000 (after paying out dividends and expenses)
• Statement 2’s cash flow figure of £160,000 (after paying out dividends and expenses)
• £200,000-£160,000 = £40,000 in retained cash flow

Why is retained cash flow important?

By understanding your retained cash flow you can gauge how well you are managing your budget and the financial stability of your business. You can discover how much cash you have available to fund growth (Net Present Value projects), or how much you need to reduce your outgoings by to make growth possible in the future.

How to improve retained cash flow

It’s possible that doing your retained cash flow calculation could highlight issues in your financial strategy.

Try not to panic! There are several steps you can take to improve your incoming cash flow and your overall retained cash flow figure. In simple terms, the most effective ways to give your cash flow a boost are:

• Reduce outgoing expenses where possible.
• Optimise your debt management procedure to free up cash that is stuck in your books. This might include automating the debt collection process and/or offering incentives to customers who settle their invoices early.
• Review your pricing and/or investigate ways to generate more revenue
• Consider a cash flow solution from Bluestone.

Cash flow solutions from Bluestone

Cash flow loans

A cash flow loan is a short-term commercial loan that can provide financial support through challenging periods in business. In simple terms, you borrow the money you need, and pay it back in fixed instalments over a short period of time.

Every business needs a healthy cash flow, but because of cash flow issues, many small business owners aren’t able to pay vendors, loans, bills, or even employees. This can prevent businesses from realising their ambitions and can, in extreme circumstances, force them to close down.

A cash flow loan is there to bridge the monetary gap left by late payments and other unforeseen circumstances.

Click here for more information on cash flow loans.

Invoice finance

Invoice finance is a collective term for the various types of invoice based lending such as invoice discounting, selective invoice discounting, invoice factoring and spot factoring. As invoice financing is an unsecured business loan in place of your invoices, you won’t have to offer up physical assets from your company.

The concept for invoice finance is simple. When you raise a customer invoice, you do not need to wait for days, weeks or months for them to pay it. Instead, you also send the invoice to a lender. The lender will advance you up to 95% of the value of the invoice straight away.

This means that you will get paid faster, boosting your cash flow and enabling you to focus on running your business.

When the customer has paid their invoice, you repay the lender. There will be interest and/or a processing fee to pay the lender for their service.

Click here for more information on invoice finance.

Asset finance

When you want to acquire new assets or invest in growth, you may not need to part with a large chunk of your cash all at once. In many cases it is possible to finance the purchase (i.e., spread the cost over a fixed period) via asset finance.

Financeable assets include (but are not limited to) technology, furniture, interior fit-out projects, plant machinery, and vehicles.

There are two types of asset finance: lease or hire purchase and while there are key differences between them, both make it possible for businesses to buy the equipment, machinery and vehicles that they need to achieve short-term goals and maximise their long-term success while maintaining a healthy cash flow.

Click here for more information on the types of asset finance.

Need cash flow support?

We can help your business to secure the best funding options and facilities, quickly and efficiently, whilst ensuring your short-term goals and long-term ambitions are considered in your financial strategy.

If you are interested in discussing cash flow support, get in touch with us today. We will assess your business’ circumstances and work with you to decide on the best solution to your cash flow issues.

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