"Cash flow after taxes" (CFAT) is an accounting term that refers to how well a company keeps cash flowing simply by doing its business. Adding a business's non-cash expenses to its after-taxes profit will provide a CFAT figure that can be used to determine a company's liquidity. Managers and investors both heed this figure, which can be an indicator of how well a business will be able to operate and pay dividends. It also can be used to compare various competing businesses' financial strength.
A business's income statement normally includes certain non-cash items, such as depreciation or amortization, which do not represent an outflow of cash. To arrive at an accurate measure of cash inflows and outflows, it is necessary to add these items back to profits. Cash flow after taxes, therefore, estimates net cash inflow generated by all of a business's operations after business expenses, interest and taxes are paid.
A business needs the net cash generated by its operations to purchase assets, pay dividends to shareholders and repay loans. This means that simply having a positive figure for cash flow after taxes is not enough to show that the enterprise is solvent. A true measure of solvency needs to take into account the ability of the enterprise to generate cash to pay its debts in a timely manner. Cash flow after taxes must, therefore, be considered in relation to liabilities that must be settled and other essential expenditures.
It is useful to compare cash flow after taxes with that of competing enterprises. All companies in a particular industry face similar problems from general economic circumstances and specific industry conditions. Just to compare the profit figures of different companies may not give a full picture, however, because this depends partly on how these enterprises are financed and on their capital expenditure policies.
Looking at cash flow after taxes may give a more accurate picture of a business's ongoing ability to continue its present level of operations into the future. Many firms fail because they run out of cash to pay their liabilities as they come due, even though the business is potentially very profitable. Measures of cash generated are especially relevant to businesses in their first years of trading, because they must plan the use of their funds carefully until they arrive at a stable profit-making position. Many business insolvencies involve start-up companies that aim to develop a promising business model but find they are unable to pay their bills as they arise.
