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are cash equivalents better than cash | cash equivalents have certain benefits over cash that make them better for some investors however both types of financial instruments are very similar and yield similarly low yields the difference between cash and cash equivalents is minimal although cash equivalents can often yield a bit more interest | |
why do companies hold cash equivalents | cash equivalents often have slightly greater yields than cash even buying one month treasury bills may yield higher rates than what a company may get on their savings account cash yields also allows a company to strategically hold low risk investments for future use while still attempting to preserve purchasing power better than holding cash directly | |
what makes a financial instrument a cash equivalent | financial instruments are defined as cash equivalents if they are highly liquid products that have active marketplaces are without liquidation restrictions and are easily convertible to cash a company should be able to sell or liquidate a cash equivalent immediately on demand without fear or material loss to the product cash equivalents are extremely low risk assets without meaningful price fluctuations the bottom linecash and cash equivalents are the most liquid current assets on a company s balance sheet the assortment of financial products that comprise the balance of this classification usually have maturities of 90 days or less are easily convertible to cash low risk and must not have restrictions that limit their liquidity companies often hold cash and cash equivalents to pay short term debt and hold capital in secure places for future use | |
what is cash back | cash back also known as cashback refers to two types of financial transactions related to credit and debit cards that have grown increasingly popular in the last two decades most commonly it s a credit card benefit that refunds the cardholder a small percentage of the amount spent on each purchase above a certain dollar threshold cash back also describes a debit card transaction in which cardholders receive cash when they make a purchase generally a small amount above the item cost | |
how cash back works | an outgrowth of credit card issuers general rewards programs cash back programs date to 1986 when the discover card was launched nationally introducing the concept since then they have become ubiquitous and nearly every major card issuer now offers the feature on at least one of its products it s an incentive for existing customers to use the card early and often and for acquiring new clients or poaching them from a competitor unlike traditional rewards points which can only be used to buy goods or services or gift cards offered by the card issuer cash back rewards are what their name implies cash they are usually presented to the cardholder on the monthly credit card statement consumers may receive the cash back reward through direct deposit to a linked bank account as a statement credit reducing that month s bill as a gift card or through the mail by check 1the year of the national debut of the discover card which pioneered cash back rewardscash back amountsthe amount of a cash back reward can range from 1 to 5 of a transaction 2 some transactions also offer extra rewards through merchant partnerships purchases at that merchant earn you more than purchases elsewhere 3credit cards often offer varying cash back levels depending on the type of purchase or transaction level for example a cardholder might earn 3 back on gas purchases 2 on groceries and 1 on all other purchases a special promotion where you can get cash back often might be in effect for three months during which spending in a specific category restaurants or department stores earns a higher refunded percentage for that period 1typically the cardholder must reach a particular transaction level to qualify for cash back or other benefits it s usually small around 25 but it varies from card to card some card companies also let cash rewards be used toward specific purchases including travel electronics or partnership incentive programs 1 in issuing a cash back reward the credit card company shares with the consumer a portion of the transaction fee that it charges merchants there is an actual retail event called cash back day which debuted in 2019 and continues annually each november in 2020 retailmenot gave its customers up to 20 cash back if they enrolled in its programs and shopped at 100 featured stores with 1 153 available offers 4cash back sites and appscash back apps and websites can also help you earn money for shopping while using their tools many cash back sites partner with retailers such as amazon and target to offer specific deals on items such as toys or holiday gear cash back sites usually operate like this first you download the app or extension and sign up for a free membership next you sign into the cash back site use a link for the store that you want to shop in and start shopping 5the cash back site or app records your purchases and you earn money after your transactions are approved and go through the cash back a percentage of your spending usually lands in a paypal or bank account cash back apps can be used to find money saving deals while earning cash in different categories including restaurants and delivery services three popular cash back programs are rakuten ibotta and shopkick although there are others 5this cash back website was ebates in another life rebranded as rakuten in 2019 the site earns its money by getting commissions from more than 2 500 stores including lowe s kohl s walmart and macy s for sending online bargain hunters its way the commissions are shared with rakuten customers which is how you earn your cash back up to 40 if you have a paypal account then your earnings can go there or the company mails you a check 6rakuten has mixed reviews on the better business bureau bbb website which gave it a b rating due to product and service issues including customers saying they never received their cash back rewards still the customer rating average is 4 25 out of five stars based on 330 customer reviews 7this cash back app can be used in stores and for online shopping via your mobile device its specialty is groceries the app is enabled in hundreds of markets and large chain stores such as trader joe s whole foods wegmans costco hannaford walmart target aldi and albertsons plus convenience stores such as 7 eleven wawa and stewart s shops lbotta is in partnership with more than 1 500 retailers and brands in categories that include health and wellness travel home and auto kids and baby pet supply sports and outdoors 89it also offers cash back on subscriptions restaurants and food delivery services ibotta doesn t list the percentage back that you ll earn by using the app still according to its website lbotta has paid out over 980 million to more than 35 million users since 2012 when it was founded and the company states that the redemption will show up in your account within 24 hours or less 810like rakuten ibotta earned a b rating from the bbb and there are compliments and complaints from users some of whom claim they haven t received their cash back on time while others say they are earning money quickly three hundred and thirty two customer reviews average out to a 2 55 customer rating out of five stars 11this mobile app lets shoppers earn gift cards in place of cash so while it is not exactly a cash back tool users can earn reward points which the company calls kicks for using the shopkick app and scanning products in participating retailers you then turn those points into gift cards for such varied companies as starbucks amazon target sephora best buy barnes noble paypal apple amc and more 12 | |
when you download the app it will show you participating retailers and products that can earn you kicks you can even earn a kick for entering a store without making a purchase through bluetooth recognition 13 the app also may offer users exclusive incentives and discounts along with rewards points 14 | shopkick has an a rating from the bbb but as of july 29 2021 there were only 27 customer reviews most of which involved complaints and averaged out to a 1 44 rating out of five stars 15cash back in handwith debit cards and some credit cards a customer may also get the opportunity to receive cash back immediately at a supermarket or other location the customer can ask the merchant to add an extra amount to the purchase price and receive this additional cash providers of services often do this to let a customer leave a cash tip however unlike the cash back process described above the practice isn t a refund the customer is just charging more on the card advantages and disadvantages of cash backthe advantages of enrolling in cash back programs are apparent you get cash back for spending your money whether using your credit or debit card or even shopping online on the downside cash back credit cards may have high annual percentage rates aprs or annual fees or put a cap on how much cash back you can earn and you do have to spend money to earn the cash 16 also you can lose your earned rewards if you don t pay your bills on time and your credit card is canceled 17cash back apps and websites may offer discounts on products along with cash back rewards some credit cards with cash back offer a sign up bonus cash back apps and websites are an easy way to earn cash rewards while shopping cash back apps and websites don t always issue your cash back in a timely manner cash back credit cards may have a higher annual percentage rate apr than cards without rewards there may be a cap on how much cash you can earn back | |
what does cash back mean | cash back usually refers to a rewards program that returns a percentage of each purchase to the buyer it can also refer to certain types of debit cards that allow cardholders to withdraw cash from their accounts at a merchant point of sale | |
is cash back free money | not exactly when a credit card offers cash back rewards they are betting that the cardholders increased spending will exceed the money spent on cash rewards cardholders pay for cash back through higher aprs and merchant fees | |
what stores give free cash back | multiple stores offer cash back rewards how much depends on their rewards program kohl s dick s sporting goods the home depot and cvs among others offer their customers cash back rewards programs 18can i get a cash back signing bonus if you sign up for a cash back card with a cash signing bonus it could be worth anywhere from 200 to 1 500 if you meet certain requirements such as a minimum spending amount in a set amount of time 1920 | |
what are the best cash back credit cards | credit card deals change frequently so it is worth taking time to research the latest deals you can also check out investopedia s review of the best credit cards currently available the bottom linesigning up with a cash back rewards credit or debit card is a way to earn some extra cash based on your purchases you can use a cash back app or website to find potential deals on goods while also making a percentage of your money back the more that you use your cash back rewards programs the more money that you stand to earn there are a few drawbacks to a cash back rewards card including a higher than usual apr having to wait to access your cash back funds and a cap on how much you can earn each year also when it comes to travel rewards such as airline miles sometimes the miles are worth more than the cash | |
what is a cash balance pension plan | a cash balance pension plan is a defined benefit pension plan with the option of a lifetime annuity the employer credits a participant s account with a set percentage of their yearly compensation plus interest charges for a cash balance plan the funding limits funding requirements and investment risk are based on defined benefit requirements changes in the portfolio do not affect the final benefits received by the participant upon retirement or termination and the company bears all ownership of profits and losses in the portfolio 1understanding cash balance pension plansa cash balance plan cbp is maintained on an individual account basis much like a defined contribution plan this means it isn t like the regular defined benefit plan instead the cash balance pension plan acts just like a defined contribution plan because changes in the value of the participant s portfolio do not affect the account balance promised by the employer the features of cash balance pension plans resemble those of 401 k plans investments are managed professionally and participants are promised a specific benefit at retirement however the benefits are stated in terms of a 401 k style account balance rather than the terms of a monthly income stream 1for instance an employee on a cash balance pension plan might receive a promise of 5 of their salary with a 5 interest credit if they made 100 000 annually they would receive a pay credit of 5 000 plus 5 interest paid on the account balance as the number of years at the employer increases the account balance grows to meet the balance promised by the company at retirement the employee can choose a lump sum or monthly annuity payment the benefits of individuals participating in private sector pension plans are protected by federal laws such as the employee retirement income security act erisa 2cash balance pension plan vs traditional pension planthe most significant difference between a cash balance pension and a traditional pension plan is that the traditional plan generally uses the last few years of your highest compensation to determine your monthly benefit a cash benefit pension plan uses the total number of years you re with the company and is designed to have a predetermined amount in the account by retirement cash balance pension plan vs 401 k besides the contribution limits the most significant difference between the cash balance pension and a 401 k is that the employer bears the investment risk in a cbp the employer is responsible for ensuring the employee receives the amount promised so no matter what happens it must ensure the employee gets that amount people 60 years and older can sock away well over 300 000 annually in pretax contributions 34in a 401 k the employee bears the investment risk because they are the ones that choose the way the plan invests the employer has no investment risk because they give employees money to invest as they see fit additionally the retirement benefit amount depends on the balance of the account advantages and disadvantages of a cash balance pension planwhile this type of plan does have several benefits there are some disadvantages to consider as well lump sum payoutsrollovertax deferredno contribution limittaxable distributionsno employee contributionshigh cost to maintainspecial considerationscombining a cash balance and a 401 k pension plan can help you slash your tax bills and bolster your nest egg because you legally have two retirement plans | |
when combined with a 401 k plan cash balance employer contributions for rank and file employees usually amount to roughly 6 9 of pay compared with the 4 7 contributions that are typical of 401 k plans only 5 | participants receive an annual interest credit this credit may be set at a fixed rate such as 5 or a variable rate such as the 30 year treasury rate at retirement participants can take an annuity based on their account balance or a lump sum which can then be rolled into an ira or another employer s plan 1cash balance pension plans are often more expensive for the employer to administer than traditional employer sponsored retirement savings plans like the 401 k that s because these pension plans require certification to ensure they re adequately funded the types of fees and amounts for each can vary but cash plans tend to have higher startup costs annual administration charges and relatively high management fees | |
is a cash balance pension plan better than a 401 k | both can be excellent retirement plans which one is better depends on your preferences goals how long you might be with an employer and current income | |
what can i do with a cash balance plan | you can choose to make withdrawals or a lump sum payout if you choose a lump sum you can roll it into an ira or other retirement plan if allowed | |
what happens to my cash balance pension if i quit | your cash balance pension is portable so you can take the vested portion with you when you quit and roll it into another retirement account the bottom linea cash balance pension plan is similar to other retirement accounts the contributions are tax deferred for the employee and the principal grows with compounding interest and capital gains the employer takes on all the investment risk and the employee can use their wages to invest in another retirement fund of their choice while a cash balance pension is an excellent retirement plan option you should choose one with caution compare it to other accounts and the tax treatment you expect to receive when you retire to see if it or another plan will work better for your financial situation | |
what is a cash budget | a cash budget is an estimation of the cash flows of a business over a specific period of time this could be for a weekly monthly quarterly or annual budget this budget is used to assess whether the entity has sufficient cash to continue operating over the given time frame the cash budget provides a company insight into its cash needs and any surplus and helps to determine an efficient allocation of cash investopedia ellen lindner | |
how a cash budget works | companies use sales and production forecasts to create a cash budget along with assumptions about necessary spending and accounts receivable collections a cash budget is necessary to assess whether a company will have enough cash to continue operations if a company does not have enough liquidity to operate it must raise more capital by issuing stock or taking on more debt a cash roll forward computes the cash inflows and outflows for a month and it uses the ending balance as the beginning balance for the following month this process allows the company to forecast cash needs throughout the year and changes to the roll forward to adjust the cash balances for all future months short term cash budget vs long term cash budgetcash budgets are usually viewed in either the short term or the long term short term cash budgets focus on the cash requirements needed for the next week or months whereas long term cash budget focuses on cash needs for the next year to several years short term cash budgets will look at items such as utility bills rent payroll payments to suppliers other operating expenses and investments long term cash budgets focus on quarterly and annual tax payments capital expenditure projects and long term investments long term cash budgets usually require more strategic planning and detailed analysis as they require cash to be tied up for a longer period of time it s also prudent to budget cash requirements for any emergencies or unexpected needs for cash that may arise particularly if the business is new and all aspects of operations are not fully realized at the end of each budgetary term the ending balance of the cash budget is carried forward to the next term s cash budget special considerationsmanaging a cash budget also comes down to carefully managing the growth of the business for example all businesses want to sell more and grow but it is crucial to do so in a sustainable way for example a company may implement a marketing strategy to boost brand awareness and sell more products the ad campaign is successful and demand for the product takes off if the company isn t prepared to meet this increase in demand for example it may not have enough machinery to produce more goods enough employees to conduct quality checks or enough suppliers to order the required raw materials then it could have many unhappy customers the company may want to build out all these aspects to meet demand but if it doesn t have enough cash or financing to be able to do so then it cannot therefore it is important to manage sales and expenses to reach an optimal level of cash flow example of a cash budgetfor example let s assume abc clothing manufactures shoes and it estimates 300 000 in sales for the months of june july and august at a retail price of 60 per pair the company estimates sales of 5 000 pairs of shoes each month abc forecasts that 80 of the cash from these sales will be collected in the month following the sale and the other 20 will be collected two months after the sale the beginning cash balance for july is forecast to be 20 000 and the cash budget assumes 80 of the june sales will be collected in july which equals 240 000 80 of 300 000 abc also projects 100 000 in cash inflows from sales made earlier in the year on the expense side abc must also calculate the production costs required to produce the shoes and meet customer demand the company expects 1 000 pairs of shoes to be in the beginning inventory which means a minimum of 4 000 pairs must be produced in july if the production cost is 50 per pair abc spends 200 000 50 x 4 000 in the month of july on the cost of goods sold which is the manufacturing cost the company also expects to pay 60 000 in costs not directly related to production such as insurance abc computes the cash inflows by adding the receivables collected during july to the beginning balance which is 360 000 20 000 july beginning balance 240 000 in june sales collected in july 100 000 in cash inflows from earlier sales the company then subtracts the cash needed to pay for production and other expenses that total is 260 000 200 000 in cost of goods sold 60 000 in other costs abc s july ending cash balance is 100 000 or 360 000 in cash inflows minus 260 000 in cash outflows | |
what are the steps of creating a cash budget | the first step to creating a cash budget is to establish reliable forecasts of the company s cash inflows and outflows some of these flows will be predictable such as rent and payroll costs others like sales figures will tend to be more variable once these figures have been estimated it is possible to prepare a cash budget that accounts for all expected inflows and outflows | |
what expenses should be included in a cash budget | a cash budget should take into account expected cash flows such as revenue as well as operational outflows due to returns payroll rent utilities supplies and other costs of running the business | |
how do you prepare a cash budget | this will depend on the time frame for which the budget is being prepared a short term cash budget of a few weeks will only account for day to day expenses related to funding and supplying a company s operations while a cash budget for a quarter or longer might also account for larger expenses like equipment capital investment and corporate taxes in each case any remaining cash surplus at the end of one budget period will be carried on to the beginning of the next | |
what is the cash conversion cycle ccc | the cash conversion cycle ccc also called the net operating cycle or cash cycle is a metric that expresses in days how long it takes a company to convert the cash spent on inventory back into cash from selling its product or service the shorter the cash cycle the better as it indicates less time that cash is bound in accounts receivable or inventory the cash conversion cycle attempts to measure how long each net input dollar is tied up in the production and sales process before it gets converted into cash received this metric considers how much time the company needs to sell its inventory how much time it takes to collect receivables and how much time it has to pay its bills the ccc is one of several quantitative measures that help evaluate the efficiency of a company s operations and management a trend of decreasing or steady ccc values over multiple periods is a good sign while rising ones should lead to more investigation and analysis based on other factors one should bear in mind that ccc applies only to select sectors dependent on inventory management and related operations formula and calculation of the cash conversion cycle ccc since ccc involves calculating the net aggregate time involved across the above three stages of the cash conversion life cycle the mathematical formula for ccc is represented as c c c d i o d s o d p o where d i o days of inventory outstanding also known as days sales of inventory d s o days sales outstanding d p o days payables outstanding begin aligned ccc dio dso dpo textbf where dio text days of inventory outstanding text also known as days sales of inventory dso text days sales outstanding dpo text days payables outstanding end aligned ccc dio dso dpowhere dio days of inventory outstanding also known as days sales of inventory dso days sales outstandingdpo days payables outstanding dio and dso are associated with the company s cash inflows while dpo is linked to cash outflow hence dpo is the only negative figure in the calculation another way to look at the formula construction is that dio and dso are linked to inventory and accounts receivable respectively which are considered short term assets and are taken as positive dpo is linked to accounts payable which is a liability and thus is taken as negative a company s cash conversion cycle broadly moves through three distinct stages to calculate ccc you need several items from the financial statements the first stage focuses on the existing inventory level and represents how long it will take for the business to sell its inventory this figure is calculated by using the days inventory outstanding dio a lower value of dio is preferred as it indicates that the company is making sales rapidly implying better turnover for the business dio also known as dsi days sales of inventory is calculated based on the cost of goods sold cogs which represents the cost of acquiring or manufacturing the products that a company sells during a period d s i avg inventory c o g s 365 days where avg inventory 1 2 bi ei bi beginning inventory ei ending inventory begin aligned dsi frac text avg inventory cogs times 365 text days textbf where text avg inventory frac 1 2 times text bi text ei text bi text beginning inventory text ei text ending inventory end aligned dsi cogsavg inventory 365 dayswhere avg inventory 21 bi ei bi beginning inventoryei ending inventory the second stage focuses on the current sales and represents how long it takes to collect the cash generated from the sales this figure is calculated by using the days sales outstanding dso which divides average accounts receivable by revenue per day a lower value is preferred for dso which indicates that the company is able to collect capital in a short time in turn enhancing its cash position d s o avg accounts receivable revenue per day where avg accounts receivable 1 2 bar ear bar beginning ar ear ending ar begin aligned dso frac text avg accounts receivable text revenue per day textbf where text avg accounts receivable frac 1 2 times text bar text ear text bar text beginning ar text ear text ending ar end aligned dso revenue per dayavg accounts receivable where avg accounts receivable 21 bar ear bar beginning arear ending ar the third stage focuses on the current outstanding payable for the business it takes into account the amount of money that the company owes its current suppliers for the inventory and goods it purchases and it represents the period in which the company must pay off those obligations this figure is calculated by using the days payable outstanding dpo which considers accounts payable a higher dpo value is preferred by maximizing this number the company holds onto cash longer thus increasing its investment potential d p o avg accounts payable c o g s per day where avg accounts payable 1 2 bap eap bap beginning ap eap ending ap c o g s cost of goods sold begin aligned dpo frac text avg accounts payable cogs text per day textbf where text avg accounts payable frac 1 2 times text bap text eap text bap text beginning ap text eap text ending ap cogs text cost of goods sold end aligned dpo cogs per dayavg accounts payable where avg accounts payable 21 bap eap bap beginning apeap ending apcogs cost of goods sold all of the above mentioned figures are available as standard items in the financial statements filed by a publicly listed company as a part of its annual and quarterly reporting the number of days in the corresponding period is taken as 365 for a year and 90 for a quarter | |
what the cash conversion cycle can tell you | boosting sales of inventory for profit is the primary way for a business to make more earnings but how does one sell more stuff if cash is easily available at regular intervals then one can churn out more sales for profits as frequent availability of capital leads to more products to make and sell a company can acquire inventory on credit which results in accounts payable ap a company can also sell products on credit which results in accounts receivable ar therefore cash isn t a factor until the company pays the accounts payable and collects the accounts receivable timing is thus an important aspect of cash management ccc traces the life cycle of cash used for business activity it follows the cash as it s first converted into inventory and accounts payable then into expenses for product or service development through to sales and accounts receivable and then back into cash in hand essentially ccc represents how fast a company can convert the invested cash from start investment to end returns the lower the ccc the better inventory management sales realization and payables are the three key ingredients of business if any of these goes for a toss say inventory mismanagement sales constraints or payables increasing in number value or frequency then the business is set to suffer beyond the monetary value involved ccc accounts for the time involved in these processes which provides another view of the company s operating efficiency in addition to other financial measures the ccc value indicates how efficiently a company s management is using the short term assets and liabilities to generate and redeploy the cash and gives a peek into the company s financial health with respect to cash management the figure also helps assess the liquidity risk linked to a company s operations special considerationsif a business has hit all the right notes and is efficiently serving the needs of the market and its customers it will have a lower ccc value ccc may not provide meaningful inferences as a stand alone number for a given period analysts use it to track a business over multiple time periods and to compare the company to its competitors tracking a company s ccc over multiple quarters will show if it is improving maintaining or worsening its operational efficiency while comparing competing businesses investors may look at a combination of factors to select the best fit if two companies have similar values for return on equity roe and return on assets roa it may be worth investing in the company that has the lowest ccc value it indicates that the company is able to generate similar returns more quickly ccc is also used internally by the company s management to adjust their methods of credit purchase payments or cash collections from debtors example of how to use the cash conversion cycleccc has a selective application to different industrial sectors based on the nature of business operations the measure has great significance for retailers like walmart inc wmt target corp tgt and costco wholesale corp cost which are involved in buying and managing inventories and selling them to customers all such businesses may have a high positive value of ccc however ccc does not apply to companies that don t have need for inventory management software companies that offer computer programs through licensing for instance can realize sales and profits without the need to manage stockpiles similarly insurance or brokerage companies don t buy items wholesale for retail so ccc doesn t apply to them businesses can have negative cccs like online retailers ebay inc ebay and amazon com inc amzn often online retailers receive funds in their accounts for sales of goods that actually belong to and are served by third party sellers who use the online platform however these companies don t pay the sellers immediately after the sale but may follow a monthly or threshold based payment cycle this mechanism allows these companies to hold onto the cash for a longer period of time so they often end up with a negative ccc additionally if the goods are directly supplied by the third party seller to the customer the online retailer never holds any inventory in house a harvard business blog post attributes the negative ccc as a key factor in amazon s survival of the dot com bubble of 2000 operating with a negative ccc became a source of cash for the company instead of being a cost for it 1 | |
what does the cash conversion cycle measure | the cash conversion cycle ccc is one of several measures of management effectiveness it measures how fast a company can convert cash on hand into even more cash on hand the ccc does this by following the cash or the capital investment as it is first converted into inventory and accounts payable ap through sales and accounts receivable ar and then back into cash generally the lower the number for the ccc the better it is for the company | |
what is the cash conversion cycle formula | cash conversion cycle days inventory outstanding days sales outstanding days payables outstanding | |
how does inventory turnover affect the cash conversion cycle | a higher or quicker inventory turnover decreases the cash conversion cycle thus a better inventory turnover is a positive for the ccc and a company s overall efficiency the bottom line | |
what is a cash cow | a cash cow is one of the four categories quadrants in the growth share bcg matrix that represents a product product line or company with a large market share within a mature industry a cash cow is also a reference to a business product or asset that once acquired and paid off will produce consistent cash flows over its lifespan understanding cash cowsa cash cow is a metaphor for a dairy cow that produces milk over the course of its life and requires little to no maintenance the phrase is applied to a business that is also similarly low maintenance modern day cash cows require little investment capital and perennially provide positive cash flows which can be allocated to other divisions within a corporation they are low risk high reward investments cash cows are one of four quadrants in the bcg matrix a business unit organization method introduced by the boston consulting group in the early 1970s the bcg matrix also known as the boston box or grid places an organization s businesses or products into one of four categories star question mark dog and cash cow 1 the matrix helps firms understand where their business stands in terms of market share and industry growth rate it serves as a comparative analysis of a business s potential and an evaluation of the industry and market however some firms especially large corporations realize that businesses products within their portfolio lie between two categories this is especially true with product lines at different points in the product life cycle cash cows and stars tend to complement each other whereas dogs and question marks use resources less efficiently a cash cow is a reference to a business product or asset that produces consistent cash flow over its lifespan it s also a reference to one of the four quadrants in the bcg matrix a business unit organization method cash cow examplea cash cow is a company or business unit in a mature slow growth industry cash cows have a large share of the market and require little investment for example the iphone is apple s aapl cash cow its return on assets is far greater than its market growth rate as a result apple can invest the excess cash generated by the iphone into other projects or products cash cows such as microsoft msft and intel intl provide dividends and have the capacity to increase their dividend due to their ample free cash flows calculated as cash flows from operations minus capital expenditures these companies are mature and do not need as much capital to grow they are marked by high profit margins and strong cash flows cash cows can also be slow growth companies or business units with well established brands in the industry special considerationsin contrast to a cash cow a star in the bcg matrix is a company or business unit that realizes a high market share in high growth markets 1 stars require large capital outlays but can generate significant cash if a successful strategy is adopted stars can morph into cash cows question marks are the business units experiencing low market share in a high growth industry 1 they require large amounts of cash to capture more of or sustain their position within the market depending on the strategy adopted by the firm question marks can land in any of the other quadrants lastly dogs are the business units with low market shares in low growth markets 1 there is no large investment requirement and they don t generate large cash flows often dogs are phased out in an effort to salvage the organization | |
what is a cash dividend | a cash dividend is the distribution of funds or money paid to stockholders generally as part of the corporation s current earnings or accumulated profits cash dividends are paid directly in money as opposed to being paid as a stock dividend or other form of value most brokers offer a choice to reinvest or accept cash dividends | |
how a cash dividend works | cash dividends are a common way for companies to return capital to their shareholders in the form of periodic cash payments typically quarterly but some stocks may pay these bonuses on a monthly annual or semiannual basis while many firms pay regular dividends there are special cash dividends that are distributed to shareholders after certain nonrecurring events such as legal settlements or the borrowing of money for large one time cash distributions each company establishes its dividend policy and periodically assesses if a dividend cut or an increase is warranted cash dividends are paid on a per share basis the timing of cash dividendsa company s board of directors announces a cash dividend on a declaration date which entails paying a certain amount of money per common share after that notification the record date is established which is the date on which a firm determines its shareholders on record who are eligible to receive the payment in addition stock exchanges or other appropriate securities organizations determine an ex dividend date which is typically two business days before the record date an investor who bought common shares before the ex dividend date is entitled to the announced cash dividend investors must report dividend earnings and they are taxable as income for the recipients irs form 1099 div will list the total amount of reportable dividend earnings | |
which companies pay dividends | companies that pay dividends typically enjoy stable cash flows and their businesses are commonly beyond the growth stage this business growth cycle partially explains why growth firms do not pay dividends they need these funds to expand their operations build factories and increase their personnel certain dividend paying companies may go as far as establishing dividend payout targets which are based on generated profits in a given year for example banks typically pay out a certain percentage of their profits in the form of cash dividends if profits decline the dividend policy can be amended or postponed to better times cash dividends are a common way for companies to return capital to shareholders accounting for cash dividends | |
when a corporation declares a dividend it debits its retained earnings and credits a liability account called dividend payable on the date of payment the company reverses the dividend payable with a debit entry and credits its cash account for the respective cash outflow | cash dividends do not affect a company s income statement however they shrink a company s shareholders equity and cash balance by the same amount firms must report any cash dividend as payments in the financing activity section of their cash flow statement the easiest way to compare cash dividends across companies is to look at the trailing 12 month ttm dividend yields which are computed as a company s dividends per share for the most recent 12 month period divided by its current stock price this computation standardizes the measure of cash dividends concerning the price of a common share cash dividend examplenike is a rather mature firm that pays quarterly cash dividends in february 2022 the sportswear brand announced a 0 305 per share quarterly cash dividend payable apr 1 2022 1 for fiscal year 2021 the company saw year over year yoy increased revenues of 19 3 meanwhile earnings per share eps rose 123 2 | |
what is a stock dividend | less common than cash dividends stock dividends instead pay shareholders with additional shares of stock | |
what is a special dividend | a special dividend is paid to shareholders outside of the regular dividend schedule it may result from a windfall earnings spin off or other corporate action that is seen as a one off in general special dividends are rare but larger than ordinary dividends | |
what are dividend aristocrats | a dividend aristocrat is a stock that increases its dividend for at least 25 consecutive years examples include at t exxonmobil caterpillar 3m and ibm among others | |
what are cash equivalents | cash equivalents are securities that are meant for short term investing normally they have solid credit quality and are highly liquid true to their name they are considered equivalent to cash because they can be converted to actual cash quickly the phrase cash and cash equivalents is found on balance sheets in the current assets section cash equivalents are one of three main asset classes in investing the other two are stocks and bonds cash equivalent securities have a low risk low return profile investopedia jessica olahunderstanding cash equivalentscash equivalents include u s government treasury bills bank certificates of deposit bankers acceptances corporate commercial paper and other money market instruments these financial instruments often have short maturities highly liquid markets and low risk cash equivalents are an important indicator of a company s financial well being analysts can estimate the advisability of an investment in a particular company by the company s ability to access cash and convert cash equivalents quickly such liquidity reflects a company that is able to pay its bills companies with large amounts of cash and cash equivalents can be primary targets of bigger companies with acquisition plans | |
when reported on financial statements investments in these types of liquid accounts are often combined with cash and represent a company s total holding of money and liquid investments | types of cash equivalentstreasury bills are commonly referred to as t bills these are securities issued by the united states department of the treasury that mature in one year or less companies financial institutions and individuals who buy t bills lend the government money which the government pays back upon maturity t bills are sold at a discount and redeemed at face value the minimum purchase amount is 100 while the maximum is 10 million for a non competitive bid or 35 of the offering amount for a competitive bid 1 the yield of t bills is the difference between the purchase price and the value at redemption commercial paper is short term less than a year unsecured debt used by big companies to raise funds to meet short term liabilities such as payroll corporations issue commercial paper at a discount from face value and promise to pay the full face value on the maturity date designated on the note maturities range from one to 270 days marketable securities are financial assets and instruments that can easily be converted into cash and are therefore very liquid they are traded on public exchanges and there is usually a strong secondary market for them marketable securities can have maturities of one year or less and the rates at which these may be traded has a minimal effect on prices examples of marketable securities include t bills cds bankers acceptances commercial paper stocks bonds and exchange traded funds etfs money market funds are mutual funds that invest only in cash and cash equivalents they are very liquid investments with excellent credit quality money market funds are an efficient and effective tool that companies and organizations use to manage their money since they tend to be more stable compared to other types of funds such as mutual funds a money market fund s share price is always 1 per share money market funds invest in cash equivalents short term government bonds are considered by some to be cash equivalents because they are very liquid actively traded securities they are issued by a government to fund government projects investors should be sure to consider political risks interest rate risks and inflation when investing in government bonds a certificate of deposit is a type of savings account with a financial institution it represents a certain amount of a saver s capital that can t be accessed by the saver for a specific period of time in return for the use of their capital the financial institution pays savers a fixed rate of interest savers can choose from cd terms ranging from one month to five years a cd is considered a very safe investment and is insured up to 250 000 when purchased at a federally insured bank should the saver need their money they may be able to break the cd contract by paying a fee or interest penalty a banker s acceptance is a form of payment that is guaranteed by a bank rather than an individual account holder because the bank guarantees payments this short term issuance by a bank is considered to be cash bankers acceptances are frequently used to facilitate transactions where there is little risk for either party some current assets though short term aren t considered to be cash equivalents if they re prohibited from being converted to cash or if they can t readily be turned into cash such assets include features of cash equivalentsdifferent types of cash equivalents usually have the same characteristics those characteristics include as of sep 30 2022 berkshire hathaway had 28 869 000 000 in cash and cash equivalents 2uses of cash equivalentsthere are several important reasons why a company should store some of its capital in cash equivalents cash equivalents are part of the company s net working capital current assets minus current liabilities which it uses to pay invoices for operating expenses buy inventory cover debt servicing and make other purchases like people companies should maintain enough easily accessible cash to handle unexpected costs that might arise for instance when business is slow or the economy stumbles investing in cash equivalents gives companies the security of cash when they need it and earns them a return the interest earned is usually higher than that earned from a basic bank account and provides some protection against inflation companies may intentionally carry higher balances of cash equivalents so they can capitalize on business opportunities when they arise instead of locking capital into a long term illiquid and maybe volatile investment a company can choose to invest added cash in cash equivalents in the event it needs funds quickly some lenders may require that in return for a loan a company maintain a designated amount of liquid cash equivalents this financial restriction is intended to protect the lender s financial interest should business slow it can also result in better loan terms due to less risk for the company that agrees to it moreover a company can benefit from the discipline of saving via cash equivalents advantages and disadvantages of cash equivalentswhile investing in cash equivalents has its benefits they also come with several downsides earns higher rate compared to cash in many savings accounts | |
is highly liquid | may offer fixed rates of interest | |
are generally considered to be safe investments | often earns a much lower rate of interest than longer term less liquid investmentsstill subject to risk of default by the issuing entitymay not be covered by federal insuranceexample of cash equivalentsin 2021 microsoft invested in held and conducted transactions with cash equivalents throughout the year | |
how are cash equivalents used | if a company has excess cash on hand it might invest it in a cash equivalent called a money market fund this fund is a collection of short term investments i e generally with maturities of six months or less that earns a higher yield than money in a bank account when the company decides it needs cash it sells a portion of its money market fund holdings and transfers the proceeds to its operating account | |
why are cash equivalents important | cash equivalents strike a balance between investing risk and liquidity they give a company easy access to cash should it need it quickly in addition cash equivalents allow companies to earn some amount of interest as they plan how to use their money in the long term | |
what is the difference between cash and cash equivalents | cash is ownership of actual u s dollars or other currencies cash equivalents are interest earning financial vehicles investments that are widely traded highly liquid and easy to convert to cash cash equivalents are not identical to cash in hand though they have such low risk and high liquidity that they re often considered as accessible the bottom lineif a company wants to earn some return on its money as it plans its long term strategy it can choose to invest some of its capital in cash equivalents these very short term low risk highly liquid investments may not make a tremendous amount of money however they earn more than cash in a bank account and can be converted into cash quickly and easily | |
what is cash flow | cash flow is the net cash and cash equivalents transferred in and out of a company cash received represents inflows while money spent represents outflows a company creates value for shareholders through its ability to generate positive cash flows and maximize long term free cash flow fcf this is the cash from normal business operations after subtracting any money spent on capital expenditures capex investopedia nono floresformula and calculation of cash flowyou can easily calculate a company s cash flow using the formula below to do this make sure you locate the total cash inflow and the total cash outflow | |
where | understanding cash flowcash flow refers to the money that goes in and out of a business businesses take in money from sales as revenues inflow and spend money on expenses outflow they may also receive income from interest investments royalties and licensing agreements and sell products on credit assessing cash flows is essential for evaluating a company s liquidity flexibility and overall financial performance positive cash flow indicates that a company s liquid assets are increasing enabling it to cover obligations reinvest in its business return money to shareholders pay expenses and provide a buffer against future financial challenges companies with strong financial flexibility fare better especially when the economy experiences a downturn by avoiding the costs of financial distress cash flows are analyzed using the cash flow statement which is a standard financial statement that reports a company s cash source and use over a specified period corporate management analysts and investors use this statement to determine how well a company earns to pay its debts and manage its operating expenses the cash flow statement is an important financial statement issued by a company along with the balance sheet and income statement 1cash flow statementthe cash flow statement acts as a corporate checkbook to reconcile a company s balance sheet and income statement 1 the cash flow statement includes the bottom line recorded as the net increase decrease in cash and cash equivalents cce the bottom line reports the overall change in the company s cash and its equivalents over the last period the difference between the current cce and that of the previous year or the previous quarter should have the same number as the number at the bottom of the statement of cash flows 1types of cash flowcash flow from operations cfo describes money flows involved directly with the production and sale of goods from ordinary operations also known as operating cash flow cfo indicates whether or not a company has enough funds coming in to pay its bills or operating expenses operating cash flow is calculated by taking cash received from sales and subtracting operating expenses that were paid in cash for the period operating cash flow is recorded on a company s cash flow statement indicates whether a company can generate enough cash flow to maintain and expand operations and shows when a company may need external financing for capital expansion 2cash flow from investing cfi or investing cash flow reports how much cash has been generated or spent from various investment related activities in a specific period investing activities include purchases of speculative assets investments in securities or sales of securities or assets negative cash flow from investing activities might be due to significant amounts of cash being invested in the company such as research and development r d and is not always a warning sign 1cash flows from financing cff shows the net flows of cash used to fund the company and its capital cfi is also commonly referred to as financing cash flow financing activities include transactions involving issuing debt equity and paying dividends cash flow from financing activities provides investors insight into a company s financial strength and how well its capital structure is managed 1 | |
how to analyze cash flows | using the cash flow statement in conjunction with other financial statements can help analysts and investors arrive at various metrics and ratios used to make informed decisions and recommendations example of cash flowbelow is walmart s wmt cash flow statement for the fiscal year ending on jan 31 2024 all amounts are in millions of u s dollars 3investments in property plant and equipment pp e and acquisitions of other businesses are accounted for in the cash flow from the investing activities section proceeds from issuing long term debt debt repayments and dividends paid out are accounted for in the cash flow from the financing activities section walmart s cash flow was positive showing an increase of 1 09 billion which indicates that it retained cash in the business and added to its reserves to handle short term liabilities and fluctuations in the future | |
how are cash flows different than revenues | revenue is the income earned from selling goods and services if an item is sold on credit or via a subscription payment plan money may not yet be received from those sales and are booked as accounts receivable these do not represent actual cash flows into the company at the time cash flows also track outflows and inflows and categorize them by the source or use | |
what is the difference between cash flow and profit | cash flow isn t the same as profit profit is specifically used to measure a company s financial success or how much money it makes overall this is the amount of money that is left after a company pays off all its obligations profit is found by subtracting a company s expenses from its revenues 1 | |
what is free cash flow and why is it important | free cash flow is left over after a company pays for its operating expenses and capex it is the remaining money after items like payroll rent and taxes companies are free to use fcf as they please | |
do companies need to report a cash flow statement | the cash flow statement complements the balance sheet and income statement it is part of a public company s financial reporting requirements since 1987 4 | |
why is the price to cash flows ratio used | the price to cash flow p cf ratio is a stock multiple that measures the value of a stock s price relative to its operating cash flow per share this ratio uses operating cash flow which adds back non cash expenses such as depreciation and amortization to net income p cf is especially useful for valuing stocks with positive cash flow but are not profitable because of large non cash charges the bottom linecash flow refers to money that goes in and out companies with a positive cash flow have more money coming in while a negative cash flow indicates higher spending net cash flow equals the total cash inflows minus the total cash outflows | |
what is cash flow from financing activities | cash flow from financing activities cff is a section of a company s cash flow statement that shows the net flows of cash that are used to fund the company financing activities include transactions involving debt equity and dividends cash flow from financing activities provides investors with insight into a company s financial strength and how well a company s capital structure is managed formula and calculation for cffinvestors and analysts will use the following formula and calculation to determine if a business is on sound financial footing cff ced cd rp where ced cash in flows from issuing equity or debt cd cash paid as dividends rp repurchase of debt and equity begin aligned text cff ced text cd rp textbf where text ced cash in flows from issuing equity or debt text cd cash paid as dividends text rp repurchase of debt and equity end aligned cff ced cd rp where ced cash in flows from issuing equity or debtcd cash paid as dividendsrp repurchase of debt and equity as an example let s say a company has the following information in the financing activities section of its cash flow statement thus cff would be as follows | |
what is cash flow from investing activities | cash flow from investing activities cfi is one of the sections on the cash flow statement that reports how much cash has been generated or spent from various investment related activities in a specific period investing activities include purchases of physical assets investments in securities or the sale of securities or assets negative cash flow is often indicative of a company s poor performance however negative cash flow from investing activities might be due to significant amounts of cash being invested in the long term health of the company such as research and development understanding cash flow from investing activitiesbefore analyzing the different types of positive and negative cash flows from investing activities it s important to review where a company s investment activity falls within its financial statements there are three main financial statements the balance sheet income statement and cash flow statement the balance sheet provides an overview of a company s assets liabilities and owner s equity as of a specific date the income statement provides an overview of company revenues and expenses during a period the cash flow statement bridges the gap between the income statement and the balance sheet by showing how much cash is generated or spent on operating investing and financing activities for a specific period types of cash flowoverall the cash flow statement provides an account of the cash used in operations including working capital financing and investing there are three sections labeled activities on the cash flow statement operating activities include any spending or sources of cash that are involved in a company s day to day business activities any cash spent or generated from the company s products or services is listed in this section including cash generated or spent on financing activities shows the net cash flows involved in funding the company s operations financing activities include cash flows from investing activities provide an account of cash used in the purchase of non current assets or long term assets that will deliver value in the future investing activity is an important aspect of growth and capital a change to property plant and equipment ppe a large line item on the balance sheet is considered an investing activity when investors and analysts want to know how much a company spends on ppe they can look for the sources and uses of funds in the investing section of the cash flow statement capital expenditures capex also found in this section is a popular measure of capital investment used in the valuation of stocks an increase in capital expenditures means the company is investing in future operations however capital expenditures are a reduction in cash flow typically companies with a significant amount of capital expenditures are in a state of growth below are a few examples of cash flows from investing activities along with whether the items generate negative or positive cash flow if a company has differences in the values of its non current assets from period to period on the balance sheet it might mean there s investing activity on the cash flow statement example of cash flow from investing activitiesbelow is the cash flow statement from apple inc aapl according to the company s 10 q report issued on june 29 2019 the three sections of apple s statement of cash flows are listed with operating activities at the top and financing activities at the bottom of the statement highlighted in orange in the center are the investing activities highlighted in blue investing activities that were cash flow negative are highlighted in red and include investing activities that were cash flow positive are highlighted in green and include the net cash flows generated from investing activities were 46 6 billion for the period ending june 29 2019 overall apple had a positive cash flow from investing activity despite spending nearly 8 billion on new property plant and equipment as with any financial statement analysis it s best to analyze the cash flow statement in tandem with the balance sheet and income statement to get a complete picture of a company s financial health | |
what activities are included in cash flow from investing activities | the activities included in cash flow from investing actives are capital expenditures lending money and the sale of investment securities along with this expenditures in property plant and equipment fall within this category as they are a long term investment | |
how do you calculate cash flow from investing activities | consider a hypothetical example of google s net annual cash flow from investing activities for the year the company spent 30 billion on capital expenditures of which the majority were fixed assets along with this it purchased 5 billion in investments and spent 1 billion on acquisitions the company also realized a positive inflow of 3 billion from the sale of investments to calculate the cash flow from investing activities the sum of these items would be added together to arrive at the annual figure of 33 billion | |
why is cash flow from investing activities important | cash flow from investing activities is important because it shows how a company is allocating cash for the long term for instance a company may invest in fixed assets such as property plant and equipment to grow the business while this signals a negative cash flow from investing activities in the short term it may help the company generate cash flow in the longer term a company may also choose to invest cash in short term marketable securities to help boost profit | |
what is cash flow from operating activities cfo | cash flow from operating activities cfo indicates the amount of money a company brings in from its ongoing regular business activities such as manufacturing and selling goods or providing a service to customers it is the first section depicted on a company s cash flow statement cash flow from operating activities does not include long term capital expenditures or investment revenue and expense cfo focuses only on the core business and is also known as operating cash flow ocf or net cash from operating activities investopedia daniel fishelunderstanding cash flow from operating activities cfo cash flow forms one of the most important parts of business operations and accounts for the total amount of money being transferred into and out of a business since it affects the company s liquidity it has significance for multiple reasons it allows business owners and operators check where the money is coming from and going to it helps them take steps to generate and maintain sufficient cash necessary for operational efficiency and other necessary needs and it helps in making key and efficient financing decisions the details about the cash flow of a company are available in its cash flow statement which is part of a company s quarterly and annual reports the cash flow from operating activities depicts the cash generating abilities of a company s core business activities it typically includes net income from the income statement and adjustments to modify net income from an accrual accounting basis to a cash accounting basis cash availability allows a business the option to expand build and launch new products buy back shares to affirm their strong financial position pay out dividends to reward and bolster shareholder confidence or reduce debt to save on interest payments investors attempt to look for companies whose share prices are lower and cash flow from operations is showing an upward trend over recent quarters the disparity indicates that the company has increasing levels of cash flow which if better utilized can lead to higher share prices in near future positive and increasing cash flow from operating activities indicates that the core business activities of the company are thriving it provides as additional measure indicator of profitability potential of a company in addition to the traditional ones like net income or ebitda cash flow statementthe cash flow statement is one of the three main financial statements required in standard financial reporting in addition to the income statement and balance sheet the cash flow statement is divided into three sections cash flow from operating activities cash flow from investing activities and cash flow from financing activities collectively all three sections provide a picture of where the company s cash comes from how it is spent and the net change in cash resulting from the firm s activities during a given accounting period the cash flow from investing section shows the cash used to purchase fixed and long term assets such as plant property and equipment ppe as well as any proceeds from the sale of these assets the cash flow from financing section shows the source of a company s financing and capital as well as its servicing and payments on the loans for example proceeds from the issuance of stocks and bonds dividend payments and interest payments will be included under financing activities investors examine a company s cash flow from operating activities within the cash flow statement to determine where a company is getting its money from in contrast to investing and financing activities which may be one time or sporadic revenue the operating activities are core to the business and are recurring in nature types of cash flow from operating activitiesthe cash flow from operating activities section can be displayed on the cash flow statement in one of two ways the first option is the indirect method where the company begins with net income on an accrual accounting basis and works backwards to achieve a cash basis figure for the period under the accrual method of accounting revenue is recognized when earned not necessarily when cash is received for example if a customer buys a 500 widget on credit the sale has been made but the cash has not yet been received the revenue is still recognized by the company in the month of the sale and it shows up in net income on its income statement therefore net income was overstated by this amount on a cash basis the offset to the 500 of revenue would appear in the accounts receivable line item on the balance sheet on the cash flow statement there would need to be a reduction from net income in the amount of the 500 increase to accounts receivable due to this sale it would be displayed on the cash flow statement as increase in accounts receivable 500 the second option is the direct method in which a company records all transactions on a cash basis and displays the information on the cash flow statement using actual cash inflows and outflows during the accounting period examples of the direct method of cash flows from operating activities include indirect method vs direct methodmany accountants prefer the indirect method because it is simple to prepare the cash flow statement using information from the income statement and balance sheet most companies use the accrual method of accounting so the income statement and balance sheet will have figures consistent with this method the financial accounting standards board fasb recommends that companies use the direct method as it offers a clearer picture of cash flows in and out of a business however as an added complexity of the direct method the fasb also requires a business using the direct method to disclose the reconciliation of net income to the cash flow from operating activities that would have been reported if the indirect method had been used to prepare the statement the reconciliation report is used to check the accuracy of the cash from operating activities and it is similar to the indirect method the reconciliation report begins by listing the net income and adjusting it for noncash transactions and changes in the balance sheet accounts this added task makes the direct method unpopular among companies indirect method formulas for calculating cash flow from operating activitiesdifferent reporting standards are followed by companies as well as the different reporting entities which may lead to different calculations under the indirect method depending upon the available figures the cfo value can be calculated by one of the following formulas as both yield the same result cash flow from operating activities funds from operations changes in working capital | |
where funds from operations net income depreciation depletion amortization deferred taxes investment tax credit other funds | this format is used for reporting cash flow details by finance portals like marketwatch orcash flow from operating activities net income depreciation depletion amortization adjustments to net income changes in accounts receivables changes in liabilities changes in inventories changes in other operating activitiesthis format is used for reporting cash flow details by finance portals like yahoo finance all the above mentioned figures included above are available as standard line items in the cash flow statements of various companies the net income figure comes from the income statement since it is prepared on an accrual basis the noncash expenses recorded on the income statement such as depreciation and amortization are added back to the net income in addition any changes in balance sheet accounts are also added to or subtracted from the net income to account for the overall cash flow inventories tax assets accounts receivable and accrued revenue are common items of assets for which a change in value will be reflected in cash flow from operating activities accounts payable tax liabilities deferred revenue and accrued expenses are common examples of liabilities for which a change in value is reflected in cash flow from operations from one reporting period to the next any positive change in assets is backed out of the net income figure for cash flow calculations while a positive change in liabilities is added back into net income for cash flow calculations essentially an increase in an asset account such as accounts receivable means that revenue has been recorded that has not actually been received in cash on the other hand an increase in a liability account such as accounts payable means that an expense has been recorded for which cash has not yet been paid example of cash flow from operating activitieslet s look at the cash flow details of the leading technology company apple inc aapl for the fiscal year ended september 2018 the iphone maker had a net income of 59 53 billion depreciation depletion amortization of 10 9 billion deferred taxes investment tax credit of 32 59 billion and other funds of 4 9 billion following the first formula the summation of these numbers brings the value for fund from operations as 42 74 billion the net change in working capital for the same period was 34 69 billion adding it to fund from operations gives the cash flow from operating activities for apple as 77 43 billion for the second method summing up the available values from yahoo finance portal that reports apple s fy 2018 net income 59 531 billion depreciation 10 903 billion adjustments to net income 27 694 billion changes in accounts receivables 5 322 billion changes in liabilities 9 131 billion changes in inventories 828 billion and changes in other operating activities 30 057 billion gives the net cfo value as 77 434 billion both the methods yield the same value special considerationsone must note that working capital is an important component of cash flow from operations and companies can manipulate working capital by delaying the bill payments to suppliers accelerating the collection of bills from customers and delaying the purchase of inventory all these measures allow a company to retain cash companies also have the liberty to set their own capitalization thresholds which allow them to set the dollar amount at which a purchase qualifies as a capital expenditure investors should be aware of these considerations when comparing the cash flow of different companies due to such flexibility where managers are able to manipulate these figures to a certain extent the cash flow from operations is more commonly used for reviewing a single company s performance over two reporting periods rather than comparing one company to another even if the two belong in the same industry | |
what is a cash flow statement | a cash flow statement is a financial statement that provides aggregate data regarding all cash inflows that a company receives from its ongoing operations and external investment sources it also includes all cash outflows that pay for business activities and investments during a given period a company s financial statements offer investors and analysts a portrait of all the transactions that go through the business where every transaction contributes to its success the cash flow statement is believed to be the most intuitive of all the financial statements because it follows the cash made by the business in three main ways 1the sum of the cash generated by these three segments is called net cash flow each has its own section of the cash flow statement which helps investors determine the value of a company s stock or the company as a whole laura porter investopedia | |
how cash flow statements work | every company that sells and offers its stock to the public must file financial reports and statements with the u s securities and exchange commission sec 2 the four main financial statements are 3there are two different methods of accounting they are 4profitable companies can fail to adequately manage cash flow which is why the statement is so important for prospective investors and business analysts let s consider a company that sells a product and extends credit for the sale to its customer even though it recognizes that sale as revenue the company doesn t yet have the cash nevertheless it earns a profit on the income statement and pays income taxes on that profit if it does this too often it faces the danger of running out of cash despite technically being profitable investors and analysts should use good judgment when evaluating changes to working capital as some companies may try to boost their cash flow before reporting periods | |
how a cash flow statement is organized | as stated above a cash flow statement is divided into three main parts operations investing and financing these break down as follows 3the first section of the cash flow statement covers cash flows from operating activities cfo and includes transactions from all operational business activities the cfo section begins with net income then reconciles all noncash items to cash items involving operational activities in other words it is the company s net income but in a cash version this section reports cash inflows and outflows that stem directly from a company s main business activities these activities may include buying and selling inventory and supplies and paying employee salaries any other forms of inflows and outflows such as investments debts and dividends are not included companies must be able to generate sufficient positive cash flow for operational growth if not enough is generated they may need to secure financing for external growth to expand for example accounts receivable is a noncash account if accounts receivable go up during a period it means sales are up but no cash was received at the time of sale the cash flow statement deducts these receivables from net income because they are not cash the cfo section can also include accounts payable debts that are incurred but not yet paid depreciation amortization and numerous prepaid items that are booked as revenue or expenses but have no associated cash flow this is the second section of the cash flow statement it looks at cash flows from investing cfi and is the result of investment gains and losses it also includes cash spent on property plants and equipment it is where analysts look to find changes in capital expenditures | |
when capital expenditures increase it generally reduces the cash flow however that s not always a bad thing as it may indicate that a company is making investments in its future operations companies with high capital expenditures tend to be those that are growing | positive cash flows within the cfi section which can be generated in such ways as selling equipment or property can be considered good however investors usually prefer that companies generate their cash flow primarily from business operations cash flows from financing cff is the last section of the cash flow statement it provides an overview of cash used in business financing and measures cash flow between a company and its owners and creditors the cash normally comes from debt or equity such as selling stocks and bonds or borrowing from a bank these figures are generally reported annually on a company s 10 k report to shareholders analysts use the cff section to determine how much money the company has paid out via dividends or share buybacks it s also useful to help determine how a company raises cash for operational growth cash obtained or paid back from capital fundraising efforts and loans is listed here | |
which kinds of cash flows show up in operations | cash inflows and outflows from business activities such as buying and selling inventory and supplies paying salaries accounts payable depreciation amortization and prepaid items booked as revenues and expenses all show up in operations | |
when capital expenditures increase what happens to cash flow | generally cash flow is reduced when capital expenditures increase as the cash has been used to invest in future operations thus promoting the company s growth | |
what does a negative cash flow from financing mean | a negative number can show that a company is paying off debt making dividend payments or buying back its stock the bottom linethe cash flow statement has three key sections operations investments and financing even if the business uses accrual accounting as its main reporting system the cash flow statement is focused on cash accounting allowing managers analysts and investors to assess how well a company is doing investors generally prefer that companies generate the bulk of their cash flow from operations rather than investing and financing after all operations are what a company is created to do | |
what is cash management | the term cash management refers to the process of collecting and managing cash flows cash management can be important for both individuals and companies it is a key component of a company s financial stability in business cash is also essential for people s financial stability while also usually considered as part of a total wealth portfolio individuals and businesses have different options to help them with their cash management needs including banks to hold their cash assets cash management solutions are also available for anyone who wants the best return on cash assets or the most efficient use of cash comprehensively investopedia nez riaz | |
how cash management works | cash is among the primary assets that individuals and companies use to pay their obligations and invest managing cash is what entities do on a day to day basis to take care of the inflows and outflows of their money proper cash management can improve an entity s financial situation and liquidity problems for individuals maintaining cash balances while also earning a return on idle cash is usually a top concern in business companies have cash inflows and outflows that must be prudently managed in order to corporate cash management involves the use of business managers corporate treasurers and chief financial officers cfos these professionals are mainly responsible to implement and oversee cash management strategies and stability analysis many companies may outsource part or all of their cash management responsibilities to different service providers regardless there are several key metrics that are monitored and analyzed by cash management executives on a daily monthly quarterly and annual basis cash management may also be known in some parts of the financial industry as treasury management the importance of the cash flow statement in cash managementthe cash flow statement is a central component of corporate cash flow management while it is often transparently reported to stakeholders on a quarterly basis parts of it are usually maintained and tracked internally on a daily basis the cash flow statement comprehensively records all of a business s cash flows it includes the bottom line of the cash flow statement reports how much cash a company has readily available the cash flow statement is broken down into three parts operating investing and financing the operating portion of cash activities tends to vary based heavily on the net working capital which is reported on the cash flow statement as a company s current assets minus current liabilities the other two sections of the cash flow statement are somewhat more straightforward with cash inflows and outflows pertaining to investing and financing managing cash through internal controlsthere are many internal controls used to manage and ensure efficient business cash flows internal controls are various accounting and auditing mechanisms that companies can use to ensure that their financial reporting is compliant with regulations these tools resources and procedures improve operational efficiency and prevent fraud some of a company s top cash flow considerations include the cash management of working capitalcash flows pertaining to operating activities are generally heavily focused on working capital which is impacted by ar and ap changes investing and financing cash flows are usually extraordinary cash events that involve special procedures for funds a company s working capital is the result of its current assets minus current liabilities working capital balances are important in cash flow management because they show the number of current assets a company has to cover its current liabilities working capital generally includes the following companies strive to have current asset balances that exceed current liability balances if current liabilities exceed current assets a company would likely need to access its reserve lines for its payables companies usually report the change in working capital from one reporting period to the next within the operating section of the cash flow statement if a company has a positive net change in working capital it increases its current assets to cover its current liabilities thereby increasing the total cash on the bottom line a negative change means a company increases its current liabilities which reduces its ability to pay them efficiently and its total cash on the bottom line there are several things a company can do to improve both receivables and payables efficiency ultimately leading to higher working capital and better operating cash flow companies that operate with invoice billing can reduce the days payable or offer discounts for quick payments they may also choose to use technologies that facilitate faster and easier payments such as automated billing and electronic payments advanced technology for payables management can also be helpful companies may choose to make automated bill payments or use direct payroll deposits to help improve payables cost efficiency cash management and solvency ratioscompanies can also regularly monitor and analyze liquidity and solvency ratios within cash management external stakeholders find these ratios important for a variety of analysis purposes as well the two main liquidity ratios analyzed in conjunction with cash management include the quick ratio and the current ratio the quick ratio is calculated from the following the current ratio is a little more comprehensive it is calculated from the following solvency ratios look at a company s ability to meet all its obligations in the long term some of the most popular solvency ratios include debt to equity debt to assets cash flow to debt and the interest coverage ratio | |
why is cash management important | cash management is the process of managing cash inflows and outflows this process is important for individuals and businesses because cash is the primary asset used to invest and pay any liabilities there are many cash management options available such as using excess cash to pay down lines of credit with a credit sweep cash management not only provides entities with a window into their financial situations but it can also be used to improve their profitability by fixing their liquidity problems | |
how can you improve your cash management | there are a number of ways an individual or business can improve their cash management some of these steps include improving their accounts receivables increasing income encouraging clients to pay early on time investing excess cash seeking out better financing rates on debt safeguarding bank accounts to prevent fraud and implementing better accounts payable processes | |
what is an example of cash management | cash management can come in various forms including the improvement of accounts payable processes let s say a business has an existing and good relationship with a vendor the two have been doing business with one another for the last five years the vendor ships supplies to the business every month and requires payment on its invoices every 30 days since the two have an amicable relationship the business negotiates payment for invoices every 45 days the bottom linecash management is the process of successfully taking care of cash inflows and outflows it s a process that s important to individuals and also for businesses being able to do manage cash efficiently means that the entity can keep money in its reserves pay off its financial obligations and invest for future development | |
what is cash on cash return | a cash on cash return is a rate of return often used in real estate transactions that calculates the cash income earned on the cash invested in a property put simply cash on cash return measures the annual return the investor made on the property in relation to the amount of mortgage paid during the same year it is considered relatively easy to understand and one of the most important real estate roi calculations investopedia matthew collinsunderstanding cash on cash returna cash on cash return is a metric normally used to measure commercial real estate investment performance it is sometimes referred to as the cash yield on a property investment the cash on cash return rate provides business owners and investors with an analysis of the business plan for a property and the potential cash distributions over the life of the investment cash on cash return analysis is often used for investment properties that involve long term debt borrowing when debt is included in a real estate transaction as is the case with most commercial properties the actual cash return on the investment differs from the standard return on investment roi calculations based on standard roi take into account the total return on an investment cash on cash return on the other hand only measures the return on the actual cash invested providing a more accurate analysis of the investment s performance the formula for cash on cash is cash on cash return annual pre tax cash flow total cash invested where aptcf gsr oi v oe amp gsr gross scheduled rent oi other income v vacancy oe operating expenses amp annual mortgage payments begin aligned text cash on cash return frac text annual pre tax cash flow text total cash invested textbf where text aptcf gsr oi v oe amp text gsr gross scheduled rent text oi other income text v vacancy text oe operating expenses text amp annual mortgage payments end aligned cash on cash return total cash investedannual pre tax cash flow where aptcf gsr oi v oe amp gsr gross scheduled rentoi other incomev vacancyoe operating expensesamp annual mortgage payments cash on cash return examplecash on cash returns use an investment property s pre tax cash inflows received by the investor and the pre tax outflows paid by the investor for example suppose a commercial real estate investor invests in a piece of property that does not produce monthly income the total purchase price of the property is 1 million the investor pays 100 000 cash as a down payment and borrows 900 000 from a bank due are closing fees insurance premiums and maintenance costs of 10 000 which the investor also pays out of pocket after one year the investor has paid 25 000 in loan payments of which 5 000 is a principal repayment the investor decides to sell the property for 1 1 million after one year this means the investor s total cash outflow is 135 000 and after the debt of 895 000 is repaid he is left with a cash inflow of 205 000 the investor s cash on cash return is then 205 000 135 000 135 000 51 9 in addition to deriving the current return the cash on cash return can also be used to forecast the expected future cash distributions of an investment however unlike a monthly coupon payment distribution it is not a promised return but is instead a target used to assess a potential investment in this way the cash on cash return is an estimate of what an investor may receive over the life of the investment | |
what does cash on cash return tell you | cash on cash return sometimes referred to as the cash yield on a property investment measures commercial real estate investment performance and is one of the most important real estate roi calculations essentially this metric provides business owners and investors with an easy to understand analysis of the business plan for a property and the potential cash distributions over the life of the investment | |
are cash on cash return and roi identical | though they are often used interchangeably cash on cash return and roi return on investment are not the same when debt is used in a real estate transaction most commercial properties involve debt and the actual cash return on the investment differs from the standard return on investment roi roi calculates the total return including the debt burden on an investment cash on cash return on the other hand only measures the return on the actual cash invested providing a more accurate analysis of the investment s performance | |
how is cash on cash return calculated | cash on cash returns are calculated using an investment property s pre tax cash inflows received by the investor and the pre tax outflows paid by the investor essentially it divides the net cash flow by the total cash invested for example an investor purchases a property for 1 million putting 100 000 cash as a down payment and borrowing 900 000 the investor also pays 10 000 cash for ancillary costs out of pocket the investor decides to sell the property for 1 1 million after having paid 25 000 in loan payments that include a principal repayment of 5 000 this means the investor s total cash outflow is 135 000 100 000 10 000 25000 and cash inflow is 205 000 1 100 000 895 000 so the investor s cash on cash return is 51 85 205 000 135 000 135 000 | |
what is cash on delivery cod | cash on delivery cod is a type of transaction where the recipient pays for a good at the time of delivery rather than using credit the terms and accepted forms of payment vary according to the payment provisions of the purchase agreement cash on delivery is also referred to as collect on delivery since delivery may allow for cash check or electronic payment eliana rodgers investopediaunderstanding cash on delivery cod a cash on delivery transaction can take different forms and may affect a company s accounting differently public companies are required to use the accrual accounting method under generally accepted accounting principles gaap with accrual accounting a company recognizes revenue at the time of the transaction and records the payment in accounts receivable if the payment is deferred private companies can use either accrual or cash accounting in cash accounting the company must wait to record the transaction as revenue until payment is received if a customer is dealing with a merchant in person and the customer makes a purchase from readily available inventory payment is collected at the time of sale as a form of cash on delivery under the accrual accounting method this leads to a shorter accounts receivable period and higher efficiency if a company allows for cod shipping it is willingly giving the customer more time to make a payment with somewhat less risk than a credit purchase for longer term accounts receivable agreements companies can set up cod shipping that allows the customer to defer payment until the time of delivery on certain mail order platforms such as ebay cod can be used to help minimize the risk of fraud between buyers and sellers overall cod does not require payment from a purchaser until they have received their purchase advantages and disadvantages of cash on deliveryfor many businesses in person cod facilitates the immediate payment of goods and services this is a significant accounting advantage because it can greatly shorten the days receivable for a business cod typically has shorter time frames to delivery than standard invoicing this is beneficial since the customer is required by an intermediary to pay at delivery with cod shipping customers have time to collect the money to make a full payment however cod shipping increases the risk that a customer will not plan appropriately for payment and the purchase will have to be returned returned purchases do not contribute to revenues and even less to profit and do entail lost shipping costs both of which are disadvantageous to the merchant and the customer experience for merchants offering a cod payment option may enhance consumer confidence in a new company that has not yet earned strong brand recognition generally established companies are unwilling to assume the risks of cod shipping opting for credit payment plans that charge interest and late payment fees however in some cases cod has an advantage over credit since the seller receives the full payment at delivery cod can also help merchants avoid some risks of buyer identity fraud stopped payments or electronic card disputes in some countries such as india cash on delivery transactions are boosting internet commerce cod transactions appeal to consumers without established credit or alternative means for paying for goods the cons of cod for businesses are that there is a greater risk that goods will be refused on delivery and there are costs involved in returning items for buyers it may be more difficult to return items if they have already paid for them at delivery a seller may be reluctant or under no obligation to accept returns even if the consumer is unhappy with the goods the payment period is shorter than with other payment methods the method provides some protection from customers who might fail to pay or pay late cash on delivery improves cash flow and budgeting consumers who do not have credit can buy products risk of delivery refusal is greater returning items can be costly for sellers who lack return infrastructure and support buyers may find it difficult to return items that do not meet expectations cash on delivery vs cash in advancecash in advance differs from cash on delivery as the buyer pays for the good or service before the product or service is delivered or shipped cash in advance payment methods such as credit are used to eliminate the seller s credit risk or the risk of nonpayment the seller benefits from cash in advance and the buyer risks receiving delayed or damaged goods or goods that are not as expected cash on delivery on the other hand has benefits for both the buyer and the seller for cash on delivery terms goods are shipped before payment is made for cash in advance terms the seller requires the buyer to make the entire payment upfront in order to initiate the shipping process this protects the seller from lost money for goods shipped without payment cash in advance is the most common form of payment for online marketplaces ecommerce and international business trade whether a business chooses to use cash on delivery or cash in advance depends on its ability to assume risk larger businesses may offer cash in advance for buyers because their accounts receivable and collections processes are more advanced | |
what is the meaning of cash on delivery | cash on delivery is when a buyer pays for goods or services once they are received cash in advance on the other hand is when payment is made before the goods or services are shipped for example an ecommerce credit transaction | |
how does cash on delivery work | buyers place an order for example on a website and request delivery the customer does not make payment while ordering the item and chooses cash on delivery as a payment method once the order is placed an invoice is prepared by the seller which is attached to the parcel the parcel is shipped from the seller to the address provided by the customer the customer pays the deliverer or shipper using cash or card the cod amount is then deposited into the account of the logistics partner or shipper the logistics company remits the amount to the seller s account after deducting the handling charges | |
what are examples of cash on delivery | examples of cash on delivery are when customers pay for a pizza that is delivered to their home when a courier delivers something that a customer has agreed to pay for when it is delivered or when a customer picks up clothing from the dry cleaning store some online stores will allow cash on delivery the bottom linecash on delivery is a payment option that has benefits for both buyers and sellers for buyers without credit cod is a convenient way to buy the things that they need for sellers as long as the goods are accepted on delivery payment is quicker ultimately the payment options that a seller provides depend on how much risk the seller is willing to assume and their capacity to handle complications such as returns and late payments | |
what is a cash out refinance | a cash out refinance is a mortgage refinancing option that lets you convert home equity into cash a new mortgage is taken out for more than your previous mortgage balance and the difference is paid to you in cash in the real estate world refinancing in general is a popular process for replacing an existing mortgage with a new one that typically extends terms to the borrower that are more favorable by refinancing a mortgage you may be able to decrease your monthly mortgage payments negotiate a lower interest rate renegotiate the periodic loan terms remove or add borrowers from the loan obligation and in the case of a cash out refinance access cash from the equity in your home investopedia madelyn goodnight | |
how a cash out refinance works | a cash out refinance allows you to use your home as collateral for a new loan as well as some cash creating a new mortgage for a larger amount than what is currently owed getting cash by using the equity in your home can be an easy way to get funds for emergencies expenses and wants borrowers seeking a cash out refinance find a lender willing to work with them the lender assesses the current mortgage s terms the balance needed to pay off the loan and the borrower s credit profile the lender makes an offer based on an underwriting analysis the borrower gets a new loan that pays off their previous one and locks them into a new monthly installment plan the amount above and beyond the mortgage payoff is issued in cash 1with a standard refinance the borrower would never see any cash in hand just a decrease to their monthly payments the funds from a cash out refinance can be used as the borrower sees fit but many typically use the money to pay for big expenses such as medical or educational fees to consolidate debt or as an emergency fund a cash out refinance results in less equity in your home which means that the lender is taking on greater risk as a result closing costs fees or interest rates can be higher than a standard refinance borrowers with specialty mortgages like u s department of veterans affairs va loans including cash out loans can often be refinanced through more favorable terms with lower fees and rates than non va loans 2lenders impose borrowing limits on how much you can borrow through a cash out refinance typically 80 of the available equity of your home 1pros and cons of a cash out refinancesavvy investors watching interest rates over time typically will jump at the chance to refinance when lending rates are falling toward new lows there can be a variety of different types of options for refinancing but in general most will come with several added costs and fees that make the timing of a mortgage loan refinancing just as important as the decision to refinance 3in addition to checking rates and fees to make sure that refinancing is a good option consider your reasons for needing the cash this refinancing option typically comes with lower interest rates than unsecured debt like credit cards or personal loans does however unlike a credit card or personal loan you risk losing your home if you can t pay your mortgage for example or if the value of your home goes down and you end up underwater on your mortgage carefully consider if what you need the cash for is worth the risk of losing your home if you can t keep up with payments in the future if you need the cash to pay off consumer debt take the steps you need to get your spending under control so you don t get trapped in an endless cycle of debt reloading the consumer financial protection bureau cfpb has a number of excellent guides to help determine if a refinance is a good choice for you 4the cash out refinance gives the borrower all of the benefits they are looking for from a standard refinancing including a lower rate and potentially other beneficial modifications borrowers also get cash paid out to them that can be used to pay down other high rate debt or possibly fund a large purchase this can be particularly beneficial when rates are low or in times of crisis such as in 2020 21 in the wake of global lockdowns and quarantines when lower payments and some extra cash may have been very helpful 5home equity loans and home equity lines of credit helocs are alternatives to cash out or no cash out or rate and term mortgage refinancing example of a cash out refinancesay you took out a 200 000 mortgage to buy a property worth 300 000 and after many years you still owe 100 000 assuming that the property value has not dropped below 300 000 you have also built up at least 200 000 in home equity if rates have fallen and you are looking to refinance you could potentially get approved for up to 80 of the equity in your home depending on the underwriting many people wouldn t necessarily want to take on the future burden of another 200 000 loan but having equity can help the amount you can receive as cash let s say your lender is willing to lend out 75 of your home s value for a 300 000 home this would be 225 000 you need 100 000 to pay off the remaining principal this leaves you with 125 000 in cash if you decide to only get 50 000 in cash you would refinance with a 150 000 mortgage loan that has a lower rate and new terms the new mortgage would consist of the 100 000 remaining balance from the original loan plus the desired 50 000 that could be taken out in cash in other words you can assume a new 150 000 mortgage get 50 000 in cash and begin a new monthly installment payment schedule for the full amount that s the advantage of collateralized loans the disadvantage is that the new lien on your home applies to both the 100 000 and the 50 000 since it is all combined together in one loan rate and term vs cash out refinanceas mentioned above borrowers have a variety of options when it comes to refinancing the most basic mortgage loan refinance is rate and term refinance also called no cash out refinancing with this type you are attempting to attain a lower interest rate or adjust the term of your loan but nothing else changes on your mortgage for example if your property was purchased years ago when rates were higher then you might find it advantageous to refinance to take advantage of lower interest rates in addition variables may have changed in your life allowing you to handle a 15 year mortgage saving massively on interest payments even though it means giving up the lower monthly payments of your 30 year mortgage with a rate and term refinance you could lower your rate adjust to a 15 year payout or both nothing else changes just the rate and term cash out refinancing has a different goal you receive the difference between the two loans in tax free cash this is possible because you only owe the lending institution what is left on the original mortgage amount any extraneous loan amount from the refinanced cash out mortgage is paid to you in cash at closing which is generally 45 to 60 days from when you apply 1compared to rate and term cash out loans usually come with higher interest rates and other costs such as points cash out loans are more complex than a rate and term and usually have higher underwriting standards a high credit score and a lower relative loan to value ltv ratio can mitigate some concerns and help you get a more favorable deal cash out refinance vs home equity loanwith a cash out refinance you pay off your current mortgage and enter into a new one with a home equity loan you are taking out a second mortgage in addition to your original one meaning that you now have two liens on your property this translates to having two separate creditors each with a possible claim on your home closing costs on a home equity loan are generally less than those for a cash out refinance if you need a substantial sum for a specific purpose home equity credit can be advantageous however if you can get a lower interest rate with a cash out refinance and if you plan to stay in your home for the long term then the refinance probably makes more sense in both cases make sure that you can repay the new loan amount because otherwise you could end up losing your home mortgage lending discrimination is illegal if you think that you ve been discriminated against based on race religion sex marital status use of public assistance national origin disability or age there are steps that you can take one such step is to file a report with the consumer financial protection bureau cfpb or the u s department of housing and urban development hud | |
what is home equity | home equity is the market value of your home minus any liens such as the amount you owe on a mortgage or a home equity loan the equity in your home can fluctuate based on real estate market conditions in the community or region where you live | |
how do i calculate home equity | to calculate the equity in your home simply subtract the mortgage balance owed from the market value of the property for example if your home is valued at 600 000 and you owe 200 000 then you have 400 000 in home equity | |
how can i use the money from a cash out refinance | there are no restrictions on how you can use the funds from a cash out refinance many borrowers use the cash to pay for a big expense such as to fund an education or pay down debt or as an emergency fund the bottom linerefinancing is a means of replacing an existing mortgage with a new one that presumably has better terms for the borrower a cash out refinance is an option within mortgage refinancing that allows the borrower to convert home equity into cash this occurs when the borrower takes out a new mortgage for more than the previous mortgage balance with the difference between the two paid out in cash | |
what is the cash ratio | the cash ratio is a measurement of a company s liquidity it calculates the ratio of a company s total cash and cash equivalents to its current liabilities the metric evaluates a company s ability to repay its short term debt with cash or near cash resources such as easily marketable securities this information is useful to creditors when they decide how much money if any they would be willing to loan to a company cash ratio formulathe cash ratio is generally a more conservative look at a company s ability to cover its debts and obligations compared to other liquidity ratios it sticks strictly to cash or cash equivalent holdings leaving other assets such as accounts receivable out of the equation the formula for a company s cash ratio is cash ratio cash cash equivalents current liabilities1 | |
what cash ratio can tell you | the cash ratio is most commonly used as a measure of a company s liquidity this metric shows the company s ability to pay all current liabilities immediately without having to sell or liquidate other assets a cash ratio is expressed as a numeral greater or less than one the company has the same amount of current liabilities as it does cash and cash equivalents to pay off those debts if the result is equal to one when calculating the ratio the cash ratio is almost like an indicator of a firm s value under the worst case scenario where the company is about to go out of business it tells creditors and analysts the value of current assets that could quickly be turned into cash and what percentage of the company s current liabilities these cash and near cash assets could cover the u s small business administration advises companies on monitoring healthy levels of liquidity capacity and collateral through the use of this and other liquidity ratios especially when building relationships with lenders 2 lenders will analyze financial statements to evaluate the health of the company when companies pursue loans there are more current liabilities than cash and cash equivalents when a company s cash ratio is less than one insufficient cash is on hand to pay off short term debt this may not be bad if the company has conditions that skew its balance sheets such as long credit terms with its suppliers efficiently managed inventory and very little credit extended to its customers the company has more cash and cash equivalents than current liabilities when its cash ratio is greater than one it can cover all short term debt and still have cash remaining in this situation a higher cash ratio is generally better but it may also reflect that the company is inefficiently utilizing cash or not maximizing the potential benefit of low cost loans instead of investing in profitable projects or company growth a high cash ratio may also suggest that a company is worried about future profitability and is accumulating a protective capital cushion example of the cash ratioapple inc held 37 1 billion of cash and 26 8 billion of marketable securities at the end of 2021 apple had 63 9 billion of funds available in total for the immediate payment of short term debt between accounts payable and other current liabilities apple was responsible for roughly 123 5 billion of short term debt 3short term ratio 63 9 million 123 5 billion roughly 0 52apple s operating structure shows the company leverages debt takes advantage of favorable credit terms and prioritizes cash for company growth the company has nearly twice as many short term obligations despite having billions of dollars on hand the current ratio and the cash ratio are very similar but the current ratio includes more assets in the numerator the cash ratio is a more stringent conservative metric of a company s liquidity limitations of the cash ratiothe cash ratio is seldom used in financial reporting or by analysts in the fundamental analysis of a company it s not realistic for a company to maintain excessive levels of cash and near cash assets to cover current liabilities it s often seen as poor asset utilization for a company to hold large amounts of cash on its balance sheet because this money could be returned to shareholders or used elsewhere to generate higher returns the cash ratio is more useful when it s compared with industry averages and competitor averages or when looking at changes in the same company over time certain industries tend to operate with higher current liabilities and lower cash reserves the cash ratio may be most useful when it s analyzed over time a company s metric may be low but it may have been directionally improving over the last year the metric also fails to incorporate seasonality or the timing of large future cash inflows this may overstate a company in a single good month or understate a company during the offseason a cash ratio lower than one does sometimes indicate that a company is at risk of having financial difficulty however a low cash ratio may also be an indicator of a company s specific strategy that calls for maintaining low cash reserves such as because funds are being used for expansion | |
what is a good cash ratio | the cash ratio varies between industries because some sectors rely more heavily on short term debt and financing such as those that rely on quick inventory turnover a cash ratio equal to or greater than one generally indicates that a company has enough cash and cash equivalents to entirely pay off all short term debts a ratio above one is generally favored a ratio under 0 5 is considered risky because the entity has twice as much short term debt compared to cash | |
what does the cash ratio measure | liquidity is a measurement of a company s ability to pay its current liabilities the cash ratio is one way to measure a company s liquidity a company with high liquidity can pay its short term bills as they come due it s going to have a more difficult time paying short term bills if it has low liquidity | |
how do you calculate the cash ratio | the cash ratio is calculated by dividing cash by current liabilities the cash portion of the calculation also includes cash equivalents such as marketable securities | |
is it better to have a high or low cash ratio | it s often better to have a high cash ratio a company has more cash on hand lower short term liabilities or a combination of the two it also means a company will have a greater ability to pay off current debts as they come due a company s cash ratio can be considered too high a company may be inefficient in managing cash and leveraging low credit terms it may be advantageous for a company to reduce its cash ratio in these cases the bottom linea company s cash ratio is calculated by dividing its cash and cash equivalents by its short term liabilities a company can strive to improve its cash ratio by having more cash on hand in case of short term liquidation or demand for payments this includes turning over inventory more quickly holding less inventory or not prepaying expenses alternatively a company can reduce its short term liabilities the company can begin paying expenses with cash if credit terms are no longer favorable the company can also evaluate spending and strive to reduce its overall expenses thereby reducing payment obligations | |
what is cash surrender value | cash surrender value is money a life insurance policyholder receives for canceling their policy before it matures or they pass away this cash value is the savings component of most permanent life insurance policies such as whole life and universal life it is also known as policyholder s equity the insurance company could deduct a fee before paying out the cash value known as a surrender charge understanding cash surrender valuesome permanent life insurance policies build cash value as you pay premiums this is money you could take out while still alive if you cancel your life insurance policy known as a surrender the insurance company will send you a check for your cash value in a whole life policy your cash value growth is guaranteed however during the early years of a whole life insurance policy the savings portion brings very little return compared to the premiums paid as time goes by you build more cash value which increases your cash surrender value 1 | |
when you surrender a policy you receive whatever you paid in premiums back tax free if you receive more than you paid in total premiums you owe income tax on your earnings 1 | cash surrender value vs cash valuein the early years of a policy life insurance companies can deduct fees upon cash surrender what you receive for your cash surrender value could be less than your current cash value balance after subtracting these fees 1the surrender charge can start as high as 10 to 35 of your policy cash value 2 if your policy has a surrender charge it goes down over time most policies end the surrender charge after 10 to 15 years at this point your cash surrender value equals your cash value 1the cash surrender value of a life insurance policy is equal to the total accumulated cash value minus prior withdrawals outstanding loans and surrender charges | |
when determining your cash surrender value you must consider any fees your company will charge for canceling your policy check your cash value balance then subtract any surrender charges to determine how much money you will receive in a cash surrender | for example suppose you take out a variable universal life insurance policy for 100 000 you make five years of payments and build up a cash value of 10 000 however the surrender change will cost you 10 of the cash value you will have to pay 1 000 in charges and you will only get 9 000 out of the cash surrender | |
don t overestimate your cash surrender value which is not reflective of the amount of coverage you have taken out for the death benefit a cash value is tied to the policy as a benefit to help offset the rise in premiums as you grow older and offers policyholders access to money they can borrow | cash surrender value for universal and variable lifeuniversal life insurance universal variable life and variable life insurance policies typically include a surrender period if you cancel during this period you may owe a surrender charge of up to 35 of your cash value balance 2 the insurer will deduct this charge from your cash value balance and pay you the remainder for your surrender value there is no surrender charge when the surrender period ends usually after 10 to 15 years 1 | |
should you surrender your policy | if you surrender your policy you end your life insurance contract you stop having to pay premiums and will receive all your cash surrender value the downside though is you lose your life insurance protection your heirs will no longer receive a death benefit when you pass away 1if you only need some of your cash value you could take a partial withdrawal this maintains your life insurance and whatever cash value is still in the policy will continue to grow you can withdraw up to what you paid in premiums tax free if you withdraw your cash value gains you would owe income tax on the gains partial value withdrawals will reduce your death benefit with universal and variable life insurance policies cash values are not guaranteed sufficient cash value must remain inside the policy to support the death benefit 2you can also access your cash value with a loan you do not owe income tax for borrowing cash value when you take out a loan but the insurance company will charge interest until you pay the money back you decide when to pay the money back if you die with an unpaid loan the insurance company will use your death benefit to pay off the loan and then pay whatever is left to your heirs 3if you want help covering your insurance premiums you could pay them using your cash value your insurance company will deduct the cost of your insurance from your cash value balance once you spend down all your cash value you need to start paying the premiums again or else you lose your coverage 1 | |
which kinds of life insurance have cash surrender values | whole universal variable universal and indexed universal life insurance often have a cash value component to them if you surrender the policy you receive your cash value minus any surrender charges 4 | |
should you get a policy with cash value | it depends on your individual financial situation if you have maxed out contributions to your retirement account have a cash nest egg saved for emergencies and you can afford the monthly premiums on a permanent life insurance policy with a cash value benefit it may be a good choice however if you cannot afford a lifetime of high premiums and you are struggling to save for retirement these accounts are not recommended as a tool for investment can you use the cash value and still keep the policy in many cases it is possible to use the cash value in your account to pay your premiums by doing so you keep the coverage in place for your beneficiaries you can also take partial withdrawals and loans against your cash value and keep the policy if you use the policy cash value your death benefit will be reduced can you sell your life insurance policy while not always advisable you may be able to sell your life insurance policy to a third party for cash this is called a life settlement 5the bottom linecash surrender value is what you receive back for canceling a life insurance policy with cash value before it matures or you pass away only permanent policies like whole life and universal life have surrender cash value if you surrender the policy you could owe fees and other charges therefore the surrender value could be less than your current cash value in addition if you surrender your life insurance policy it will impact your listed beneficiaries as you will no longer have insurance protection investopedia does not provide tax investment or financial services and advice the information is presented without consideration of the investment objectives risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors investing involves risk including the possible loss of principal investors should consider engaging a financial professional to determine a suitable retirement savings tax and investment strategy | |
what is cash value life insurance | cash value life insurance is a form of permanent life insurance lasting for the lifetime of the holder that features a cash value savings component the policyholder can use the cash value for many purposes including borrowing or withdrawing cash from it or using it to pay policy premiums 1investopedia xiaojie liu | |
how cash value life insurance works | cash value insurance is permanent life insurance because it provides coverage for the policyholder s life usually cash value life insurance has higher premiums than term life insurance because of the cash value element a portion of each premium payment is allocated to the cost of insurance and the remainder deposited into a cash value account 2the cash value of life insurance earns interest and taxes are deferred on the accumulated earnings while premiums are paid and interest accrues the cash value builds over time as the life insurance cash value increases the insurance company s risk decreases because the accumulated cash value offsets part of the insurer s liability example of cash value life insuranceconsider a policy with a 25 000 death benefit the policy has no outstanding loans or prior cash withdrawals and an accumulated cash value of 5 000 upon the death of the policyholder the insurance company pays the full death benefit of 25 000 money accumulated in the cash value becomes the property of the insurer because the cash value is 5 000 the real liability cost to the life insurance company is 20 000 25 000 5 000 whole life variable life and universal life insurance are all examples of cash value life insurance term insurance is not cash value insurance accessing the cash value of life insurancethe cash value component serves as a living benefit for policyholders from which they may access funds there are several ways to do that for most policies partial surrenders or withdrawals are permissible though these reduce the death benefit some policies allow for unlimited withdrawals while others restrict how many draws can be taken during a term or calendar year some policies limit the amounts available for removal e g a maximum of 500 if you withdraw more than the amount you ve paid into the cash value that portion will be taxed as ordinary income 2most cash value life insurance arrangements allow for policy loans from the cash value as with any other loan the issuer will charge interest on the outstanding principal the outstanding loan amount will reduce the death benefit dollar for dollar in the event of the death of the policyholder before full repayment of the loan 2cash value may also be used to pay policy premiums if there is a sufficient amount a policyholder can stop paying premiums out of pocket and have the cash value account cover the payment | |
why consider cash value life insurance | policyholders of permanent life insurance have the ability to borrow against the accumulated cash value which comes from regular premium payments plus any interest and dividends credited to the policy | |
should i look into buying a cash value life insurance policy | those looking to build a nest egg over a time horizon of several decades may want to consider cash value life insurance as a savings option alongside a retirement plan like an ira or 401 k be aware that cash values often don t begin accruing until two to five years have passed and you may have to wait several years to access the cash value or pay a penalty 3 | |
are cash value policy premiums high | yes cash value policy premiums are typically higher than regular life insurance because part of your payment goes toward savings | |
what happens when you withdraw cash from life insurance | if you make a withdrawal from the cash value in a life insurance policy the death benefit will decrease if you withdraw everything the policy terminates withdrawing money from life insurance is tax advantaged in that the irs considers your withdrawals a return of the premiums you paid for the policy so you can withdraw that amount of money without paying taxes any gains from dividends or interest however would be taxed but these would not occur until after you ve withdrawn all your premium payments 4the bottom linecash value life insurance provides a mechanism for policyholders to accumulate funds for future use a portion of each premium is deposited into an interest bearing savings account and the cash value grows tax free over the lifetime of the deposit this cash can be accessed for a variety of purposes during the insured s lifetime | |
what was the catalog of federal domestic assistance cfda | the catalog of federal domestic assistance cfda was a database of various federal assistance programs in the u s it provided a full listing of programs available to corporations government agencies u s territories and individual citizens however the cfda has since changed its information now accessible through the sam gov website sam gov continues to provide information on government assistance and can make it easier for users to find and apply for federal programs understanding the catalog of federal domestic assistance cfda the u s federal government through various agencies and departments offers a range of assistance such as grants loans scholarships property and counseling beginning in 1984 information about these domestic assistance programs was compiled by the general services administration which published it in the cfda many but not all programs provided financial assistance foreign aid was not included in 2018 the cfda s website was retired after it was consolidated with other government systems programs to streamline the awards process 1 a listing of federal assistance programs can now be found on sam gov entities that used the cfda included listings were available through the cfda s official website cfda gov 2 individuals or organizations seeking to access programs through the cfda needed authorization to conduct business with the federal government each program listed online was assigned a unique number by agency and program enabling data and funding transparency each cfda number contained five digits and appeared as the first two digits indicated the agency responsible while the last three digits indicated the program itself 3transition to the sam gov websitethe catalog was consolidated with nine other federal government systems in may 2018 this consolidation led to the retirement of the cfda website with its functions being transferred to the sam gov website the primary goal of this change was to make it easier for authorized entities to do business with the government 2 now the cfda and the other integrated systems can be accessed through the assistance listings section of sam gov the new system still provides information on a variety of assistance programs including loans grants insurance and scholarships 4as of the transition the federal government offered 2 293 domestic assistance programs the department of health and human services led the way with 521 programs accounting for 22 7 of the total offerings other departments with a high volume of assistance programs included the department of the interior the department of agriculture the department of justice and the u s department of housing and urban development hud once you identify a federal assistance listing that you re interested in you can link directly to grant opportunities on grants gov or follow up with that specific agency using the contact information provided on sam gov |
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