Unconventional Cash Flow

  

Categories: Accounting

Your cash flow is a rebel. It plays by his own rules. It doesn’t listen to society. It’s an unconventional cash flow.

A conventional cash flow pattern involves cash going in one direction overtime. You might have negative cash flow in the first year of doing business, but once you turn positive, it stays positive. One change in direction...that’s the usual situation: the conventional cash flow pattern.

An unconventional cash flow pattern is more volatile. Sometimes, your company posts positive cash flow. Sometimes, it's negative. It bounces back and forth between plus and minus...more than one change in direction.

You started your company in 2014. You had negative cash flow in 2014 and 2015. It switched to positive in 2016 and has been positive since...in the plus territory for 2017, 2018, and 2019. That situation represents a conventional pattern.

Your sister started her business at the same time. It had negative cash flow in 2014, but quickly jumped into positive territory for 2015 (you really had to listen to some insufferable bragging that Thanksgiving). But (and you pointed this out at the next Fourth of July picnic), her business slipped back into the negative in 2016. It was positive again in 2017 and 2018. But negative again in 2019. That situation represents an unconventional pattern.

Related or Semi-related Video

Finance: What is free cash flow?13 Views

00:00

Finance allah shmoop what is free cash flow Well it's

00:06

the cash a company produces and pretty much after everything

00:10

like whatever dot com has one hundred million bucks in

00:12

pre tax profits A tax bill of thirty milton at

00:15

them seventy million dollars in earnings But they also had

00:18

depreciation on their whatever stamping factory of ten million dollars

00:22

So in fact they generated eighty million dollars in cash

00:25

while having seventy million in earnings And no there were

00:28

no tricky things done in the year to draw down

00:30

inventory volumes to produce a lot more cash or any

00:33

other chick a nunnery here The company also has committed

00:35

to paying a dividend of five milic order or twenty

00:38

mil a year That dividend payment gets included in the

00:41

free cash flow calculation as well So after eighty million

00:44

in cash production from operations the dividend the company pays

00:48

out to shareholders then is taken out of that eighty

00:51

So the free cash number Yep sixty million bucks And

00:54

why does this number even matter Well if you go

00:56

old school on investing and think about what a share

00:59

of a given company buys you in the form of

01:01

earnings and cash or dead on the balance sheet this

01:04

year Next year in the next you can think of

01:07

whatever dot com in terms of having a free cash

01:10

flow yield That is if the company was valued at

01:13

a billion dollars and it had one hundred million dollars

01:15

of cash and one hundred million dollars of dead zero

01:18

net cash or debt And yes this is oh so

01:21

theoretical Well then the company would have a six percent

01:24

free cash flow yield right because it's generating sixty million

01:27

after everything over a bill so that sixty mill is

01:30

the free cash flow But investors get the free cash

01:33

flow in some form most likely justin accumulation of cash

01:36

on the balance sheet and then they also get another

01:39

twenty mill in dividends So add to that twenty million

01:42

dividends and assuming you get no growth or decline while

01:45

investors or buying in it a billion dollar valuation while

01:48

they be getting a total of eight percent of their

01:50

cash back in one form or another each year either

01:53

in just cash produced by the company free castle and

01:55

or that dividend or set another way the sixty million

01:58

free cash flow would presumably then just accumulate on the

02:01

balance sheet Adding value to the company is cash piled

02:03

up or would be used wisely in one form or

02:06

another presumably like to buy back stock or by competitors

02:09

or whatever other whatever's The key idea here is that

02:12

free cash flow is truly free It's not encumbered It

02:16

is an ode for dividends or other big sinking fund

02:19

obligations This year or other things it's free and available

02:23

for the company to do You know whatever they want 00:02:26.105 --> [endTime] with

Up Next

Finance: How is inventory managed for cash flow purposes?
3 Views

How is inventory managed for cash flow purposes? In order to avoid the cost of carrying slow moving or out of favor inventory that would take space...

Finance: What is cash flow v earnings?
17 Views

What is cash flow vs. earnings? Earnings are how much a company has made in profit after they have paid things like taxes and operating expenses. C...

Find other enlightening terms in Shmoop Finance Genius Bar(f)