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What is Incremental Cash Flow?
Malcolm Tatum
Malcolm Tatum
Incremental cash flow is additional revenue that is generated when a business or other type of organization launches a new project. Cash flow of this type is considered to be outside the standard and usual sources of cash that the organization enjoys, and remains in that class or status until the project is fully integrated into the normal operations of the entity. One of the benefits of identifying this revenue is that it makes the task of measuring the progress, or lack of it, associated with the new project. This in turn aids in evaluating the value of the project to the organization, making it easier to determine if the project should continue or be abandoned.
In identifying the true contribution of the incremental cash flow, several factors must be considered. First, the costs of launching and continuing to operate the project are weighed against any income that the project generates. Assuming that the initial return is greater than the costs of launching and operating the project, it means that there is a state of positive incremental cash flow. This is the ultimate goal for the business, since it serves as a strong indicator that the project is a viable source of revenue and has the potential to be integrated into the basic operations of the company.
When the cash flow is determined to be negative, this means that the return generated by the project is not covering costs as anticipated. At this juncture, the company may choose to either phase out the project and cut its losses, or consider reworking the project in an attempt to make it more profitable. Assuming that the negative flow can be converted into a positive one, the business can take a second look at the project and determine if the returns are worth the time and resources required to maintain the project. At that point, the project becomes part of the core operation or is shut down.
Businesses routinely have more than one source of incremental cash flow operating at any one time. The source of the revenue may include marketing projects that are field testing new products in regional areas, or the sale of a new product in a market that is new to the company. Since some of those projects are likely to end with a negative cash flow, business do stand to sustain a loss that is normally used to claim deductions on taxes at the end of the qualifying period.
Malcolm Tatum
After many years in the teleconferencing industry, Michael decided to embrace his passion for trivia, research, and writing by becoming a full-time freelance writer. Since then, he has contributed articles to a variety of print and online publications, including WiseGEEK, and his work has also appeared in poetry collections, devotional anthologies, and several newspapers. Malcolm’s other interests include collecting vinyl records, minor league baseball, and cycling.
Learn more...
Malcolm Tatum
After many years in the teleconferencing industry, Michael decided to embrace his passion for trivia, research, and writing by becoming a full-time freelance writer. Since then, he has contributed articles to a variety of print and online publications, including WiseGEEK, and his work has also appeared in poetry collections, devotional anthologies, and several newspapers. Malcolm’s other interests include collecting vinyl records, minor league baseball, and cycling.
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Discussion Comments
I do have a doubt about this matter.
I am creating a business case for a long-term project. The asset will take almost three years to be completed, hence the income will be perceived after three years. How do I create the incremental cash flow? Should I start the incremental cash-flow from the moment I made the first down payment (even though the assets are still deemed as "Work in Progress" and are not being depreciated) or should I accrue everything in the first year and recognize my Capex disbursements when I start to depreciate the asset and hence start to receive incomes from it?
So if I understand correctly incremental cash flows are new sources of income from projects started on the side. I wonder if an analogy can be drawn from part-time businesses. For example, I used to do some real estate investing, rental properties mainly, which generated a cash flow of an extra $500 per month.
Obviously I didn’t quit my day job. But with this side work I can easily identify if I’m making money or losing money, and also if it’s worth continuing the investments. Maybe this is an overly simplistic analogy, but this is one incremental cash flow example that comes to mind, at least to me anyway.
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