Cash Flow – Cash Flow Notes

soeren_alexander_petersen asked:


In a typical cash flow statement for year 0, do you include the total investment or just the equity investment that one injected into the project?

Also, when calculating the NPV/IRR, does one use the total investment or just the equity part?
E.g. if the equity part (such as through stocks or out-of-pocket cash) is 25% and debt financing is 75% – do you include the whole 100% in year 0 and as part of the NPV calculation or only the 25%?

Matthew Rawl

Cash flow is a term usually used to define a revenue of expense stream that changes an account over time, or the general amount of cash received and used by a company during a specific period. Cash flows are essential to solvency and can be a record of past events or events expected to happen in the future. It is essential to an entity’s survival as it determines whether or not there is sufficient cash to pay off creditors. Cash flow is not the same as taxable income as many things can be subtracted from cash flow such as loan income, depreciation, and amortization deductions and things can be added to it such as retired loans and long-term assets.

Cash flow is a generic term used to describe different ideas depending on the context. In accounting, for example, there is the statement of cash flows which is used to determine a company’s ability to invest further cash into creating a profit. This statement is different from an income statement as it is only concerned with actual cash on hand and not cash owed. Cash flow is derived from three major sources: operating activities, investing activities, and financing activities. Operating activities include cash used during the regular course of business. Investment activities include cash used or earned from investments or acquisitions. Financing activities involves cash used or earned from financing, Loans, stock, or dividends.

The Cash flow statement is one of the four main statements a company produces for accounting purposes. There are many reasons for measuring cash flow such as: to evaluate the state a business is in, to determine if there are any liquidity problems, to project a rate of returns, and to measure the income or growth of a business.

Cash flow matching is when a company or person matches their cash inflows to their cash outflows. It is an effective but impractical method of doing away with interest rate risk. If an investment has a positive cash flow its market value will increase or decrease inversely with the spot interest rate of maturity. An investment is matched when every cash outflow is equal to every cash inflow on the same date and vice versa.

Whenever cash flow is mentioned in the media, what is being referred to is often operating cash flow and this can cause a misleading view of the figures as investment activities and financing activities aren’t’ accounted for. Businesses can often reclassify financial and investment activities as operating activities in order to provide a more positive outlook of their figures. This can be done by: selling receivable for cash, not paying vendors for a couple weeks after period end, buying leased equipment, etc.

As you can see, cash flow is a complex subject and the term cash flow covers many different subjects. The term’s meaning is relative depending on the specific context surrounding it when it’s brought up. Its general meaning regardless of subject concerns on hand cash paid and earned during a specific period.



By: Usha Pradhan

About the Author:

Kiersten Jaber

The dreaded “B” word drums up a lot of emotions in people. Often budgets are associated with cost cutting or even financial failure or bankruptcy. However budgets are by businesses and other successful people to establish a spending plan and to map out their financial future. Budgets are a useful starting point in establishing your financial plan but they are narrowly focused and typically only look at your expenses.

I like to establish a cash management plan that looks at your cash flow needs over time that can then be used to establish a strategy to meet your needs. The cash flow management plan will help you tie in your household net worth statement and net worth goals.

Cash Management Planning 101

In my article on net worth planning I showed you how to prepare a household net worth statement. The household net worth statement measures the value of what you own and what you owe at a single point in time. On the other hand, the cash flow statement tells you where your cash came from and where it went over a period of time.

Note that net worth can only grow if cash flow is positive or if you have savings. Savings are positive when the annual cash in flows exceed the annual cash out flows. The accumulation of savings is why we use cash management planning as one of the key financial tools.

If your savings over a period are not adequate to achieve your household net worth target, then steps must be taken to correct the situation either by increasing income or reducing expenses. If your adjustments still do not help, you must re-evaluate your net worth goal.

If you are generating savings cash management planning can help you set a higher net worth target and then meet the target with higher savings. On the other hand, If you have inadequate savings techniques you can use to improve your cash flow include:



Control your current expenses by restraining spending on discretionary purchases such as coffee at the local shop or buying lunch everyday at work.

Restructuring your debts



Consolidating high interest credit card debt

Refinance your home to lower interest expenses or payments

Discard or discontinue credit cards

Defer big ticket purchases





Reposition assets to improve cash flow by postponing the purchase of:



Non-essential consumer goods (i.e. that fur coat)

Non-income producing investments like gold, coins, or art

Negative cash flow investments in leveraged real estate or other investments requiring long-term periodic payments







Preparing A Cash Flow Statement

The starting point for cash flow planning is the cash flow statement. The statement looks much like a budget and if you have never done a budget before you will need your bank and credit card statements to determine your historical cash receipts and disbursements (I include credit cards because many times people substitute credit cards for cash).

Looking At Your Cash Flow Statement

The main objective of cash management planning is to find out how adequate your savings are to meet your net worth objectives. Net worth targets can be refined to include investment, educational and retirement funding objectives. Cash management planning helps achieve these goals systematically.

Cash flow planning helps you identify flexible (i.e. discretionary) expenses and fixed (or non-discretionary) expenses. Also helps you understand your situation and identify any excess spending and control cash outflow to a more desirable level. Note that the flow statement will not cover every single cost. Many of us have very large “other” out flows of cash that are unexplained.

If you have kept a monthly budget and stayed on target you are on the right track. However, the budget is only a part of the equation and the key to long term success is the development of a systematic savings strategy. The savings strategy includes specific plans to generate required savings, systematically direct savings to specific financial goals.



By: Dean Paley

About the Author:

Margarette Knouse

mary j asked:


Cash flow is equal to earnings before taxes minus depreciation
1) false
2) true

Lonnie Donnalley

Discounted Cash Flow is an accounting method used when analyzing an investment and determining its attractiveness. In this method, future cash flows are estimated and discounted, giving them a present value. If the value arrived at is higher than the current cost of the investment, then the opportunity should be a good one. There are actually four different approaches to the Discounted Cash Flow method: flows to equity approach, adjusted present value approach, weighted average cost of capital approach, and total cash flow approach.

The Discounted Cash Flow method must take into account many different things when determining the value of an investment such as how risky it is, the size of the company being studied, the time period that the investment will be held for, the debt to equity ratio, real or nominal basis of cash projections, and income tax considerations. Even though the different calculations may seem complex, the purpose of Discounted Cash Flow analysis is simply to estimate the monies you’d receive from an investment, adjusting for the time value of money.

Author Ronald W. Hilton states that there are four assumptions to be withheld when calculating Discounted Cash Flow. First, cash flows are to be treated as though they occur at year’s end. Cash flows associated with investment projects are treated as though they were known with certainty. Cash inflows are assumed to be reinvested in other investments, earning money for the company. Finally, Discounted Cash Flow analysis assumes a perfect capital market. While these four assumptions are not usually satisfied, they still provide an effective means of investment analysis.

The time value of money plays a huge part in the Discounted Cash Flow method and can be confusing for those with little knowledge of it. It’s not that difficult however, when you consider and understand how the value of money changes over time. When asked whether he or she would rather have a dollar today or a dollar tomorrow, the answer will almost certainly be today. This combined with factors such as inflation make money more valuable today then in the future. That is in essence the purpose of the Discounted Cash Flow model, to take what a company will make in the future and discounting it to present value.

The Discount Cash Flow rate reflects the risk premium, that is the return in excess of the “risk-free rate of return” that an investment is expected to provide. An asset’s risk premium is a method of payment for investors who don’t mind the extra risk, compared to a risk-free asset or investment. Discounted Cash Flow reveals the additional return investors wish for because they want to be paid for the risk that the cash flow might not provide a return after all.

When calculating the Discounted Cash Flow, keep in mind that its purpose is merely to provide an estimate, not a precise number. You will find that depending on different method and figures that an investment’s value can change dramatically. Therefore, don’t become too preoccupied with the details and specific numbers.



By: Usha Pradhan

About the Author:

Angel Hobbie