Net cash flow
For a working spreadsheet example of cash flow metrics in the business case financial statement, download the free financial metrics tool (click here).
Net cash flow is the heart of the financial business case, and the basis for deriving other financial metrics. Cash flow, like income, focuses on the difference between money coming in and money going out over a time period:
Net Cash Flow = Cash Inflows - Cash Outflows
Cash flow results do not, however, include some items found in the income statement, such as depreciation expense. Depreciation expense, for example, does not represent an actual cash payment during the reporting period, but rather an accounting charge against earnings. As a result, depreciation expense is not a "cash outflow" in the above equation. The income statement tells stockholders and taxing authorities what the company is credited with earning during a period; the cash flow statement tells management how much cash they have to work with (or how much they gained or lost).
Lining up the cash flow results of several time periods creates a cash flow stream such as this Business Case example:
| Business Case Results | |||
| Timing | Total Cash Inflows | Total Cash Outflows | Net Cash Flow |
| Now | $0 | $100 | -$100 |
| Year 1 | $40 | $20 | +20 |
| Year 2 | $50 | $30 | +20 |
| Year 3 | $75 | $35 | +40 |
| Year 4 | $90 | $30 | +60 |
| Year 5 | $100 | $40 | +60 |
| Total | $355 | $255 | +$100 |
The action or acquisition under consideration is expected to bring a net cash flow of $100 over five years. But does this represent a good business decision? Can the returns be improved? Where are the risks? The level of detail in this table is the minimum data needed to begin answering such questions.
Note Each column and row tells a story: Inflows continue to rise throughout the 5-year period, but so do total outflows. Management will want to use this understanding and the data behind it, for instance, to apply financial tactics: : reduce costs, increase gains, accelerate gains.
In a nutshell, a business case summary should always include a net cash flow stream because it
- Shows actual inflow and outflow figures, which are important for budgeting and business planning
- Provides the basis for calculating other financial metrics, such as NPV, DCF, IRR, and payback
- Is the beginning point for management actions to manage and optimize overall results
For a working spreadsheet example of cash flow metrics in the business case financial statement, download the free financial metrics tool (click here).
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