Retained Cash Flow: What It Is and How It Works

What Is Retained Cash Flow (RCP)?

Retained cash flow (RCP) is a measure of the net change in cash and cash equivalent assets at the end of a financial period. It is the difference between the incoming and outgoing cash for the period. Retained cash flow includes the remaining cash after an entity uses cash for expenses and returning cash to capital suppliers, such as paying off debt obligations or paying dividends. RCP is typically used to reinvest in positive net present value (NPV) projects, thereby growing the business.

Understanding Retained Cash Flow (RCP)

Retained cash flow is a good indication of the cash available for reinvestment in future growth and innovation efforts. It is a useful metric when creating a budget, gauging financial success, and forecasting future revenues and expenses. 

When a company doesn't have positive RCP and wishes to finance positive NPV projects, an entity may need to go to the capital markets to raise additional funds. This is a more costly method, as retained cash is almost always the cheapest source of new money.

Special Considerations

The cash that a company has is important. Retained cash flow is the net increase or decrease in cash a company has from one period to the next. To calculate retained cash flow you need the cash flow statement from the two most recent periods. 

Essentially, retained cash flow 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 less dividends for two periods. 

For example, say Company ABC generated $200 million in operating cash flow for the fourth quarter of 2020 and paid out $50 million in dividends. Then, in the first quarter of 2021, 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 vs. Retained Earnings 

Retained earnings have nothing to do with the cash the company has on hand. Instead, it’s a running total of all the company’s profits and losses since its first day in business. Profits generated but not paid out as dividends are considered retained earnings. 

For example, if a company has $10 million in retained earnings, that does not equate to $10 million in cash. Say a company makes $100 million in profit and pays $75 million in dividends, its retained earnings would be $25 million. Retained earnings are past profits, which are generally reinvested back into the company.