Cash flow from assets definition

What is Cash Flow from Assets?

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:

This measurement does not account for any financing sources, such as the use of debt or stock sales to offset any negative cash flow from assets.

Examples of Cash-Producing Assets

A business may own an array of assets that generate positive cash flow. Here are several examples:

  • Factories. For any organization that manufactures goods, the bulk of its cash flow comes from its factories. The machinery and other equipment within a factory are essential to this cash generation.

  • Inventory. Retail organizations acquire merchandise and sell it off at a markup in order to generate cash flow.

  • Investments. A business may invest in all types of securities in order to generate dividend and interest income.

  • Real estate. A business may invest in real estate in order to generate rental income. This is how a real estate investment trust generates income.

  • Royalties. A business may own intellectual property on which it collects royalties. Examples are books, formulas, circuit designs, and brand labels.

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Example of Cash Flow from Assets

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

How to Create Positive Cash Flow

Management can generate positive cash flow from assets by using a variety of techniques, including the following:

  • Raise prices

  • 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

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