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Cash flow from assets (CFFA) is the total cash flow generated by a company’s assets, excluding cash flow from financing activities. It reflects a company’s ability to generate cash inflows from its main operations using its current and fixed assets.
In this article, we will delve into the concept of cash flow from assets and why it’s important to track it, as well as its calculation formula.
Cash flow from assets (CFFA) represents the total cash generated by a business’s assets within a specific period. It reflects its operational efficiency and financial health. Cash flow from assets focuses only on cash generated by operations, excluding external financing activities, such as selling stocks.
CFFA includes three types of cash flows:
Understanding CFFA provides insights into a business’s operational efficiency, financial stability, and ability to generate cash internally, which is critical for sustainable growth and strategic decision-making.
Calculating CFFA provides a better understanding of a company’s financial health, operational efficiency, and strategic effectiveness, making it a critical metric for stakeholders and investors alike. Here are the main reasons why you should track CFFA:
In summary, CFFA serves as a compass for navigating the financial landscape of a business, offering invaluable guidance to stakeholders, investors, and management in assessing financial health, operational efficiency, and strategic direction.
The calculation of CFFA requires specific metrics. Here’s a guide to help you figure out your company’s CFFA:
The first step is calculating your company’s operating cash flow (OCF), that is, cash flow from operations. To determine your company’s OFC, refer to its statement of cash flows and find the section “Cash flow from operating activities” or “Cash flow from operations.” The final figure in this section represents your operating cash flow, which indicates the cash generated or used in the business’s core operations.
Move to the “Cash flows from investing activities” section on your statement of cash flows, which may also be labeled as “Cash flow from investing.” Identify the amount spent on capital assets, often listed as “Purchases of property, plant, and equipment,” and subtract any proceeds from selling capital assets. The resulting figure is your net capital spending (NCS), which indicates the net cash used for or received from investments in the company’s long-term assets.
Determine your company’s change in net working capital (𐤃 NWC) by comparing the balance sheets from two consecutive periods, such as fiscal quarters or years. Calculate the NWC for each period by subtracting current liabilities from current assets. Then, subtract the earlier period’s NWC from the later period’s NWC to find the change in NWC.
Once you have calculated your company’s operating cash flow, net capital spending, and change in net working capital, you can calculate your CFFA using the following formula:
CFFA = Operating Cash Flow (OCF) – Net Capital Spending (NCS) – Change in Net Working Capital (𐤃 NWC)
By applying this formula, you can determine the total cash generated or used by the company’s assets during the specified period, providing valuable insights into its financial performance and operational efficiency.
Increasing CFFA is essential to improve liquidity, fund expansion initiatives, and fortify their financial resilience, and various strategies can enhance CFFA and contribute to long-term sustainability. Optimizing operations is a fundamental approach to increasing CFFA. By streamlining processes, businesses can minimize waste and inefficiencies, ultimately reducing operational costs and enhancing cash flow. This may involve implementing lean manufacturing practices, improving supply chain management, and minimizing downtime in production.
Efficient management of accounting-related processes also plays a significant role in boosting CFFA. Accelerating the collection of accounts receivables through early payment discounts and proactive credit policies can expedite cash inflows. Additionally, monitoring inventory levels and implementing just-in-time inventory systems can reduce holding costs and optimize cash utilization.
Another strategy to increase CFFA is to sell underutilized assets that are not essential to core business operations, providing an immediate cash influx. Continuously evaluating and reducing unnecessary expenses, managing debt efficiently, and revising pricing strategies can also enhance cash flow from assets.
Furthermore, ensuring asset diversification mitigates risks associated with overreliance on a single asset or market segment. By diligently monitoring and optimizing these areas, businesses can incrementally improve their CFFA, positioning themselves for sustained growth and resilience in the face of financial uncertainties.
Sources:
Investopedia. Cash Flow: What It Is, How It Works, and How To Analyze It.
GoCardless. What Are Cash Flow Assets?
Indeed. A Guide To Cash Flow From Assets.
altLINE. How To Calculate Cash Flow From Assets.
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