For government and nonprofit entities, retained cash flow is a key indicator of financial health, stability, and the ability to self-fund strategic initiatives or weather unexpected expenses.
Retained Cash Flow vs Retained Earnings
While both retained cash flow and retained earnings relate to what's kept within the organization, they represent different concepts:
Basis:
- Retained Cash Flow is based on actual cash flow.
- Retained Earnings is based on accrual accounting and net income.
What They Reflect:
- Retained Cash Flow reflects liquidity and the cash available for use.
- Retained Earnings reflects cumulative profits that have not been distributed.
Common Uses:
- Retained Cash Flow is used in treasury management and credit analysis.
- Retained Earnings is used for equity valuation and fund balance tracking.
Retained cash flow is more relevant for analyzing an organization’s liquidity and ability to meet obligations, while retained earnings provide a historical view of accounting performance on the balance sheet.
How is Retained Cash Flow Used?
Organizations use retained cash flow to:
- Build or replenish reserves
- Fund capital projects without new debt
- Meet debt service obligations
- Improve credit ratings
- Prepare for emergencies or revenue volatility
For public sector teams, a strong RCF can reduce reliance on external borrowing and demonstrate fiscal responsibility.
How to Calculate Retained Cash Flow
To calculate retained cash flow, start with net income and adjust it by adding back non-cash expenses and subtracting dividends or surplus transfers.
The most common way to calculate it is by starting with cash flow from operations and subtracting any distributions or transfers.
Retained Cash Flow Formula
Here’s a basic formula:
Retained Cash Flow = Net Income + Non-Cash Charges – Dividends/Distributions
Or, if using the cash flow statement:
Retained Cash Flow = Cash Flow from Operations – Dividends/Distributions
Retained Cash Examples
Example 1:
A city reports the following:
- Net income: $2,000,000
- Depreciation (non-cash): $500,000
- Surplus transfer to capital fund: $1,000,000
Retained Cash Flow = $2,000,000 + $500,000 – $1,000,000 = $1,500,000
Example 2:
A nonprofit has:
- Cash flow from operations: $750,000
- Distribution to endowment fund: $100,000
Retained Cash Flow = $750,000 – $100,000 = $650,000
Strategies to Improve Retained Cash Flow
- Increase recurring revenue (ex., utility rates, service fees, grants)
- Reduce operating expenses and improve efficiency
- Refinance or restructure debt to reduce interest payments
- Limit discretionary transfers or distributions
- Strengthen internal controls to prevent unplanned outflows
What’s important here?
Retained cash flow measures how much cash your organization keeps on hand after covering essential expenses, and it’s a key indicator of financial flexibility. Unlike retained earnings, it focuses on liquidity, not accounting profit.
For public sector and nonprofit teams, improving retained cash flow supports long-term sustainability, reduces reliance on borrowing, and boosts resilience in uncertain times.
