What is incremental cash flow?

For example, if a company is considering investing in a new production facility, it would need to calculate the incremental cash flow that the investment would generate. This would involve estimating the additional revenue that the facility would generate, as well as the additional costs associated with operating the facility. The difference between the two represents the incremental cash flow that the investment would generate.

A helpful formula for calculating incremental cash flow:

• Incremental Cash Flow = Revenues - Expenses - Initial Cost

Let's say that your company is deciding between two products to invest in. Using the incremental cash flow formula can help you figure out which product to invest in. For example:

Product 1 is projected to have revenues of $200,000, expenses of $90,000, and an initial cash outlay of $15,000.

• Product 1 ICF = 200,000 - 90,000 - 15,000 = $95,000

Product 2 is expected to bring in revenues of $500,000, but will require expenses of $350,000 and initial costs of $65,000.

• Product 2 ICF = 500,000 - 350,000 - 65,000 = $85,000

At first glance, Product 2 seems like the obvious choice, with expected revenue of $500,000 a year compared to Product 1, which is only expected to generate $200,000 a year. When you look at expenses and costs, however, you can see Product 2 has higher expenses, as well as a more significant cash outlay. You stand to make $10,000 more in incremental cash flow by going with Product 1.

As you can see, if you have a positive incremental cash flow, it means that your company's cash flow will increase after you accept it. That's a good indicator that it's worth investing in a project. On the other hand, a negative incremental cash flow indicates that your cash flow will decrease, which means that it may not be the best option. As you can see from the example above,

Incremental cash flow is an important concept in financial analysis, as it helps companies evaluate the potential return on investment for various business decisions. By calculating the incremental cash flow associated with a particular investment, companies can determine whether the investment is likely to generate a positive return and make more informed decisions about where to allocate their resources.