Initial Cash Flow

What Is Initial Cash Flow?

Initial cash flow is the total money that is available when a project or business is in the planning stages. The figure includes any loans or investments made in the project. It is usually a negative figure since launching a business requires capital investment in the hopes of generating future income.

Initial cash flow is factored into the discounted cash flow analysis that is used to evaluate the feasibility of a project.

Initial cash flow can also be called initial investment outlay.

Understanding Initial Cash Flow

During the capital budgeting process, the attractiveness of a project is evaluated based on the cash flows that are expected to be generated by the project over its life, compared to the initial cash flow needed to get it started.

What Initial Cash Flow Includes

The initial cash flow figure includes all operating and equipment costs for the planning stage.

In some cases, the total may be offset by the salvage value. For instance, if a company is retooling a plant to adapt it for the production of a new product, old equipment no longer needed might be sold off. In such cases, the capital gains tax or loss on the sale is also factored in.

The net proceeds will offset the cash outlay for the project.

Future Value

Using discounted cash flow analysis, the future value of the cash flows over the life of the project is brought back to its present value to help determine whether it is worth the investment.

The initial cash flow is paid in at the start of the project. This number isn't discounted because it is not a future value but a present one. It is "time zero."

This analysis is crucial. An error in the cash flow or discount rate estimation can lead a company to undertake an unprofitable project.

Example of Initial Cash Flow Analysis

Now, how much money does the restauranteur expect to bring in once home delivery is on the menu? The restauranteur can estimate it based on current business activity and knowledge of the local market.

As long as the estimated income is greater than the initial cash flow, the project may be worth pursuing.

Analyzing the Alternatives

In this example, as in many others, the business owner may be wise to conduct additional analyses on the alternatives for a home delivery business. An alliance with DoorDash or UberEats would significantly reduce the restaurant's initial cash flow number.

However, delivery apps charge both the restaurant and the customer for every order. And that reduces the business cash flow, not just initially but long term.