What are the 4 cash streams?
Rather than using the convex and convoluted computation methods of accounting with its accrual and depreciation, this economic evaluation website simplifies every money flow into four cash streams. This method uses only the cash actually being spent (not committed) and the cash actually being received (not accrued).
These cash flows are based on the ‘physical’ flows inside the business, whether manufacturing or information technology. It becomes visual like being in a helicopter above.
Each evaluation model can quickly sort all its data into:
Cash Stream 1: Revenue– which is derived from sales and price.
Cash Stream 2: Operating Costs or Expenses– which are derived from production and operations.
Cash stream 3: Capital Costs– construction and on-going
Cash Stream 4: Royalties and Taxes– as are paid out in cash using government legislation on deductions for capital expenditure (and not accounting depreciation)
Net Cashflow – these four are summed to give the total cash in/cash out each year or month.
There are no other money flows outside these four.
- Sunk costs are excluded (but may be included in the countries legislated deductions for capital expenditure)
- Working capital usually is included in cash stream 2: operating costs and perhaps cash stream 3.
- Tax is included when it is paid in cash not when it becomes liable.
Adopting these four cash streams makes modelling so much easier and transparent than the old-fashioned convoluted modelling. Anyone can readily ‘see’ the business inside the evaluation model and immediately understand everything!