Cash flow from assets is the aggregate total of all cash flows related to the assets of a business. This information is used to determine the net amount of cash being spun off by or used in the operations of a business. The concept is comprised of the following three types of cash flows:
Changes in working capital. This is the net change in accounts receivable, accounts payable, and inventory during the measurement period. An increase in working capital uses cash, while a decrease produces cash.
Changes in fixed assets. This is the net change in fixed assets before the effects of depreciation.
For example, a business earns $10,000 during the measurement period, and reports $2,000 of depreciation. It also experiences an increase of $30,000 of accounts receivable and an increase of $10,000 in inventory, versus an increase of $15,000 in accounts payable. The business spends $10,000 to acquire new fixed assets during the period. This results in the following cash flow from assets calculation:
+$12,000 = Cash flow generated by operations ($10,000 earnings + $2,000 depreciation)
-$25,000 = Change in working capital (+$15,000 payables - $30,000 receivables - $10,000 inventory)
-$10,000 = Fixed assets (-$10,000 fixed asset purchases)
-$23,000 = Cash flow from assets
Management can generate positive cash flow from assets by using a variety of techniques, including the following:
Redesign products to reduce materials costs
Cut overhead to reduce operating costs
Tighten credit to reduce the investment in accounts receivable
Lengthen payment intervals to suppliers
Switch to using lease financing to acquire fixed assets