Retained Cash Flow (RCP)

Retained cash flow (RCP) is essentially a measure of the net change in cash and cash equivalents by the top of a financial period. It gives an insight into the net increase or decrease of money that a company has at the start of one accounting period to the following. The retained income of a company is a vital metric for evaluating the financial success of the company or organization.

RCP is the difference between the incoming and outgoing cash for the amount. Retained cash flow includes the remaining cash after entity uses cash for expenses and returning cash to capital suppliers, like paying off debt obligations or paying dividends. RCP is usually wont to reinvest in positive net present value (NPV) projects, thereby growing the business.

RCP is the amount left to a company after all expenses and debt obligations have been paid. It is also the amount left in a company after outgoing cash has been deducted from cash inflow.

In most cases, our 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.

Retained cash flow (RCP) may be a good indication of the cash available for reinvestment in future growth and innovation efforts. It’s a useful metric when creating a budget, gauging financial success, and forecasting future revenues and expenses. When an organization doesn’t have positive RCP and needs to finance positive NPV projects, an entity might have to travel to the capital markets to boost additional funds. This is often a more costly method, as retained cash is nearly always the most affordable source of the latest money.

Retained cash flow (RCP) formula:

  • First off, we need to locate our company’s from the previous two financial periods.
  • Then, find the figure for the total cash flow on the statements.
  • Next, we need to subtract dividends and expenses from each statement’s total cash flow figure.
  • Finally, determine the difference between the figures, and we’ll have completed our retained cash flow calculation.

For example, if our 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 we have £20,000 in retained cash flow.

Oftentimes, the retained cash flow of a company is positive, there are however some cases when the quantity of money and cash equivalents available in a very company is minimal or almost negative.

Essentially, retained cash flow (RCP) is the cash provided by operating activities, excluding changes in various accounts including accounts receivable, inventory, and accounts payable, minus cash dividends. RCP is generally considered the difference between the operating cash flow fewer dividends for two periods.

For example, say Company XYZ generated $200 million in operating cash flow for the fourth quarter of 2019 and paid out $50 million in dividends. Then, in the first quarter of 2020, the company generated $125 million in operating cash flow and paid $50 million in dividends. Thus, its RCP is $75 million (($200 million – $50 million) – ($125 million – $50 million)).

Retained cash flow (RCP) is a wonderful metric for gauging the financial health of a business, providing us with insight into the efficiency of our budget. It can help us be told what quantity cash are available for reinvestment in growth and whether our business’s expenses must be trimmed to enhance future revenues. If our company incorporates a positive retained cash flow, we will use the cash to finance projects and boost the business’s growth trajectory.

 

Information Sources:

  1. thebusinessprofessor.com
  2. investopedia.com
  3. gocardless.com