What is an economic cash flow? - Moonflow

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Do you know what economic cash flow is ? There are so many similar terms when referring to a company's finances that it is easy to confuse them. In this post from Moonflow, a collection system , we tell you more about it.

What will you find in this text?

What is economic cash flow?

Formula to know the economic cash flow

Healthy cash flow example

How can economic cash flow be improved?

What is economic cash flow?
There is a simple way to define a company's economic cash flow. It refers to the company's ability to cover the expenses (expenses-obligations) it generates with its own income.

In other words, economic cash flow measures whether a company can buy targeted email list enough money from its normal activities to pay its expenses and remain operational without having to resort to borrowing or selling assets. Because of this, it is a clear indication of an organization's financial sustainability.

Formula to know the economic cash flow
As for the economic cash flow formula, the one that applies is the following:

Economic Cash Flow = Net Result + Amortizations − Working Capital − Investment in the Next Fiscal Year

Where

Net Income : The company's net profit after taxes.
Amortizations: They are added because they represent accounting expenses that do not affect actual cash.
Working Capital: It is subtracted because it is the difference between current assets and current liabilities.
Investment in the Next Fiscal Year: This is subtracted because it represents the capital expenditure planned for the future, which will reduce the amount of cash available at present.
Healthy cash flow example
Let's imagine that SaludPlus SA, a health insurance company , is evaluating its economic cash flow for the fiscal year. Below are the components necessary to calculate it:

Net Result: SaludPlus SA reported a net profit of S/1,200,000 after taxes.

Amortizations: During the same period, the company had amortizations for S/200,000. These are accounting expenses that do not affect the actual cash flow, so they are added together.
Working Capital: SaludPlus SA's working capital is calculated as current assets minus current liabilities. In this case, current assets are S/500,000 and current liabilities are S/300,000, which gives a working capital of S/200,000. This value is subtracted because it represents the amount of money that is trapped in the company's operating cycle.
Investment in the Next Fiscal Year: SaludPlus SA plans to invest S/400,000 in upgrading its computer system and expanding its offices. This investment is subtracted because it will reduce the amount of cash available.