![]() ![]() Operating and Maintenance Expensesīusinesses make new investments in capital assets in the hope of achieving greater operating efficiencies, which is a benefit. Capital assets can be depreciated, and although depreciation does not produce a cash flow directly, it does provide an income tax benefit or credit, which needs to be included in the business case model. It's important to separate these capital costs from operating and maintenance expenses when analyzing a project. Most projects or business cases involve building or buying something, usually an asset, which provides some kind of future benefit. When assessing a project's impact, the convention is to evaluate cash flow on an incremental basis. If they understand how and why each of these is used, they can analyze any project correctly: ![]() In order to properly model cash flow for the purposes of building a business case, the financial analyst only has to be concerned with six concepts. We've covered the topic of how to put together a statement of cash flows in another article. In general, this statement will include a formula or calculation that considers:Ĭash and Cash Equivalents (Beginning) + Cash from Operations - Cash Flows from Investing Activities + Cash Flows from Financing Activities = Cash and Cash Equivalents (Ending) ![]() Statement of Cash FlowĪ statement of cash flow is one of several financial statements that public companies construct and share with their stakeholders. The advantage of this approach, above and beyond the benefits of modeling the movement of cash, is that it allows the analyst to put together a business case without worrying about the financing decisions, which are choices best left to the CFO. Evaluating ProjectsĪfter a brief introduction to the statement of cash flow, the remainder of this article will be dedicated to the topic of using cash flows to evaluate a project using a business case. Here is where a distinct split occurs because each of these uses is constructed on a macro (statement of cash flow) or micro (project or investment cash flow) basis. Now that we've explained the concept of cash flow, it's time to discuss the two practical, and important, uses of the concept: evaluating projects and constructing statements of cash flow. ![]()
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