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:

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

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.

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

Related Courses

Business Ratios Guidebook 
Financial Analysis 
The Interpretation of Financial Statements