Cash flow is a critical metric in determining the financial health and success of any business. It gives insight into how effectively a company generates cash to fund its operations, pay debts, and generate profit for its investors. One way to assess cash flow is by analyzing the company’s assets. In this article, we will discuss how to calculate cash flow from assets to gain an understanding of a business’s overall financial performance.

What is Cash Flow from Assets?

Cash flow from assets (CFFA) stands for the total amount of cash generated or used by a company’s assets during a specified period. CFFA is crucial in determining a business’s investment potential and its ability to meet its financial obligations.

The components of cash flow from assets:

1. Operating Cash Flow (OCF)

2. Capital Expenditures (CapEx)

3. Net Working Capital (NWC)

By combining these three components, we can find the CFFA equation:

CFFA = Operating Cash Flow – Capital Expenditures + Net Working Capital

Let’s dive deeper into each of these components.

Operating Cash Flow (OCF)

Operating cash flow refers to the cash generated from a company’s primary business activities. OCF is an indicator of how well a company can meet its ongoing operational expenses and invest in growth opportunities without relying on external funding.

To calculate operating cash flow, follow these steps:

1. Gather relevant financial data from the income statement.

2. Adjust the net income for non-cash items like depreciation and amortization.

3. Factor in changes in working capital – changes in accounts receivable, inventory, and accounts payable.

4. The result will be your operating cash flow.

Capital Expenditures (CapEx)

Capital expenditures are funds spent on acquiring or upgrading fixed assets such as machinery, buildings, vehicles, and technology systems that are expected to produce long-term benefits. These assets are often crucial to maintaining a company’s ability to generate revenue.

To find capital expenditures:

1. Analyze the cash flow statement for any investments in property, plant, and equipment (PPE).

2. Alternatively, you can compare the PPE balance in two consecutive balance sheets and adjust for any accumulated depreciation.

3. The amount spent on acquiring or upgrading these assets is your capital expenditure (CapEx).

Net Working Capital (NWC)

Net working capital measures the difference between a company’s current assets and its short-term liabilities. It helps determine if a firm has enough resources to cover its day-to-day expenses without relying on external funding.

To calculate net working capital, follow these steps:

1. Identify the current assets and current liabilities from the balance sheet.

2. Subtract the current liabilities from the current assets.

3. The resulting value is your net working capital.

Calculating Cash Flow from Assets

Now that you have calculated operating cash flow, capital expenditures, and net working capital, you can compute cash flow from assets using the CFFA equation:

CFFA = Operating Cash Flow – Capital Expenditures + Net Working Capital

By analyzing CFFA, you can gain insights into your company’s financial health and investment potential. Regularly monitoring cash flow from assets can help keep your business on track and identify areas where improvements may be needed to ensure long-term stability and growth.