The total cash flow for a period can be computed as:
Income from Operations (*see below)
+ Depreciation
- Taxes
- Capital Spending
- Increase in Working Capital
------------------------------
Total (Free) Cash Flow
Explanation:
Income from operations equals revenue minus costs and expenses and is the major source of cash.
However, two adjustments must be made to get to actual cash inflow:
- Income from operations is before taxes are deducted, so taxes need to be subtracted here to get a corrected cash flow,
- Also, depreciation charges are included in income from operations but do not lower cash in the period, so depreciation is added back to get a corrected cash flow.
(Additional note: The total cash flows used in an NPV (net present value) analysis should come from well-prepared proforma financial statements developed for the project. The total project cash flows for a period can be computed as above.)
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Income Statement
for the period x through y
Net Sales
- Cost of Goods Sold
-------------------------
Gross Profit
Sales & Marketing
Research & Development
General & Administrative
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Operating Expenses
Gross Profit
- Operating Expenses
-------------------------
Income from Operations*
+ Net Interest income
- Income taxes
-------------------------
Net Income
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