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:
- Cash flow is generated by operations. This is net income plus all non-cash expenses, which usually include deprecation and amortization.
- 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 in 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:
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