Cash flows refer to the movement of money into and out of a business or individual’s finances. They can fall into operating, financing, and investing cash flows. Similarly, cash flow statements provide a snapshot of these cash inflows and outflows, helping assess financial health and liquidity.
The primary source of cash flows for any company is assets. These are resources that a company owns or controls and cause inflows of economic benefits. However, they may also contribute to outflows.
What is Cash Flow from Assets?
Cash flow from assets is a financial measure that evaluates the cash generated or utilized by a company’s operating and investment activities. It provides insights into how effectively a company makes cash from its core operations and how it allocates cash for investing in assets. By subtracting the company’s cash outflows from its cash inflows, cash flow from assets considers both the operating cash flow and the net capital expenditure.
Calculating cash flow from assets helps investors, analysts, and financial managers assess a company’s ability to generate cash and its investment decisions. It provides valuable information about the company’s operational efficiency and the effectiveness of its capital allocation. Positive cash flow from assets is generally favourable as it indicates that the company generates surplus cash for growth or shareholder returns.
How to Calculate Cash Flow from Assets?
Cash flow from assets comes from different sources. Therefore, companies can accumulate inflows and outflows from all these sources to calculate the cash flow from assets. However, companies can also use other methods to do so. The formula for cash flow from assets can also be helpful in the calculation.
Cash flow from assets = Operating cash flow – Net capital expenditure
In the above cash flow from assets formula, operating cash flow represents the cash generated or used in the company’s daily operations. Companies can calculate it as follows.
Operating cash flow = Net income + Non-cash expenses + Changes in working capital
Similarly, net capital expenditure represents the net amount of cash used for investment activities during a specific period. Its formula is as below.
Net capital expenditure = Capital expenditure – Proceeds from asset sales
What are the sources of Cash flow from Assets?
Cash flow from assets represents the overall cash generated or used by a company’s operating and investment activities. These can come from different sources, including the following ones.
Operating cash flow
It is the cash flow generated from the company’s core operations. It includes cash inflows from sales revenue and other operating income and cash outflows for operating expenses, such as wages, raw materials, and overhead costs.
Investments and divestments
Cash flows can also arise from investments in new assets or divestments of existing assets. Capital expenditures for purchasing or upgrading assets represent cash outflows, while proceeds from selling assets represent cash inflows.
Financing Activities
While not directly related to assets, financing activities can impact cash flow from assets indirectly. Cash inflows from issuing debt or equity financing can provide additional funds to invest in assets. In contrast, cash outflows for debt repayments or dividends can reduce available cash for asset-related activities.
Sale of assets
Cash inflows may come from sales of resources, such as property, plant, and equipment. When a company sells an asset, the cash received from the sale increases its cash flow from that asset.
Conclusion
Cash flow from assets includes any cash generated or spent on a company’s resources. These may come from various sources. However, they generally fall under operating, financing, and investing activities on the cash flow statement. Cash flow from assets is the primary source of cash flow for companies. They can calculate those cash flows using the formula above.
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