Cash earnings are selected types of earnings that are used in determining net worth. Basically, cash earnings involve determining the total amount of cash revenues and deducting any cash expenses from that total. There are specific types of expenses that are not included in the calculation of cash earnings, such as depreciation.
While the use of the term "cash earnings" can sometimes be very broad, one fact should be understood about any application of the term. Cash earnings is not the same as cash flow. Cash flow tends to focus on the rate and amount of cash that is coming into the business, without any real segregation of the type of cash that is involved. This is a different approach to understanding the health of the company and is one important consideration. However, it does not serve the same purpose as calculating cash earnings.
One of the easiest ways to understand cash earnings is to look at those components in the most recent profit and loss statement of the company. The first task is to identify any line item that is understood to have been earned or paid for with the use of cash. Depreciation is not a consideration, since that would involve non-cash charges along with cash transactions. Amortization is also not part of the process, since that would also include non-cash transactions.
The point of establishing the current status of cash earnings is helpful for two reasons. First, cash earnings involve the acquisition and disbursement of several types of liquid assets. Understanding how quickly those resources are being replenished as well as knowing how these earnings are being used will make it easier to understand just how financially solid the corporation is when it comes to short term operation. Second, the analysis of cash earnings can often help point the way toward a more efficient use of resources, either by making adjustments in expenses by changing vendors, or refining the process whereby cash revenues are received.
