What is the after-tax cash flow?
When you hear “after-tax cash flow”, you may think of being flush with cash from getting a hefty refund check from the IRS. After-tax cash flow actually has a very different meaning – it’s a way for businesses to measure their cash flow through operations to determine if their operations, income, and cash flow are healthy. After-tax cash flow is often referred to as cash flow after taxes, or CFAT.
What is Cash Flow?
Cash flow is the term used to describe the money that goes in and out of a business, or any transaction that occurs. Cash flow can be positive, where you have more cash coming in than leaving your business, or negative, where you have more cash exiting your business than income.
When accounting for cash flow, a business may separate their money spent or income into various categories that make the most sense for their business, such as financing or operations. For example, with operating cash flow, you’d monitor the net cash income and expenditure from business operations, and you’d need to have a positive cash flow for your business to grow. In a financing cash flow, you’d monitor how much cash is moving between the business and the business owners or debtors, and these cash flow statements would include debt payments.
Cash flow is also often monitored in business for investing cash flow. When a business tracks their investing cash flow, they’re monitoring the amount spent on investments, including traditional investments such as stocks, and also physical investments such as property or equipment.
What does cash flow have to do with taxes?
When a business wants to determine their after-tax cash flow, what they really want to know is how taxes have impacted their profits. Non-cash charges, such as depreciation or amortization, are added to your net income to determine the after-tax cash flow. These non-cash charges reduce the amount of tax that you owe to the IRS as they represent the effect of aging on your assets. Therefore, it’s important to account for depreciation and amortization after taxes to determine the impact on your cash flow, so you have an idea of if your business cash flow is healthy.
How do you calculate after-tax cash flow?
The formula for after-tax cash flow, or cash flow after taxes (CFAT) is:
CFAT = net income + depreciation + amortization + non-cash charges
Let’s say you have a lemonade stand. You earned $100 dollars this season with your lemonade stand as a net income. The stand has a depreciation value of $20. You’d calculate your CFAT as:
$100 + $20 = $120 CFAT
It’s important to note that there is a difference between cash flow and profit.
Profit is the balance that remains when you subtract your business expenses from your revenue. If you end up with a negative number, you have a loss. Profit is how much money you have leftover after you’ve paid your bills, while cash flow is a better indicator of the net movement of cash in and out of your business.
Getting help with your business taxes
Learning how to calculate your after-tax cash flow is an important part of determining if your business is healthy. Taxes can be complicated if you own a business, but tax professionals such as the team at Diversified Tax are available to help guide you through the process.
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