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Excess Cash Flow


Excess cash flow refers to the remaining amount of cash a business has after it has paid off its expenses, operational costs, and capital spending. It indicates the financial health of a company, showing that it is generating more cash than is required to run and grow the business. This remaining cash can potentially be utilized for reinvestment, distributing dividends, repaying debt, or other purposes.


The phonetics for “Excess Cash Flow” would be: ek-ses kash floh

Key Takeaways

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  1. Excess Cash Flow indicates a company’s financial health: Healthy cash flow allows businesses to meet their short-term financial obligations, invest in their growth, and provide returns to shareholders. Excess Cash Flow suggests that the company is making substantial profit.
  2. It is an important factor for investment decisions: Investors look closely at a company’s cash flow. Excess cash flow can be used to pay dividends, buy back shares, or reinvest in the business – all of which can signal a strong future performance and attract investors.
  3. Determines a company’s capacity to take on debt: Lenders often look at excess cash flow when determining a business’s ability to service debt. A high Excess Cash Flow might mean a company has the capacity to take on more debt to finance potential growth opportunities.

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Excess Cash Flow is a critical concept in business finance as it represents the liquidity and financial flexibility of a company. It is the remaining cash after a company has met its operational expenses, capital expenditures, and debt obligations. This indicates the company’s ability to generate cash beyond what is needed for routine operations, which it can then use for various strategic objectives. These objectives could include investing back into the business, paying dividends to shareholders, reducing debt, or saving for future opportunities or contingencies. A consistent generation of excess cash flow is generally seen as a positive sign, highlighting a company’s financial health and its profitability levels. Therefore, excess cash flow is an important indicator for investors and creditors when assessing a company’s performance and stability.


Excess cash flow is a significant indicator of a business’s financial health and operational efficiency, used extensively in financial planning, analysis, and in decision-making processes. It essentially represents the amount of cash generated by a business’s operations that exceeds its necessary working capital and capital expenditure. The excess cash is a valuable financial resource that can fund company growth, reduce debt, cover unforeseen expenses, or increase shareholder value through dividends or share buybacks.The purpose of calculating excess cash flow is to ascertain the amount of cash a business has for additional investment after mandatory expenses have been met. Understanding a company’s excess cash flow provides potential investors, lenders, and the company management with an idea of the company’s financial stability, flexibility, and the ability to generate shareholder returns. It acts as a buffer against financial difficulties, demonstrating sufficient cash availability, even after covering all operating expenses and required investments. Therefore, having a good amount of excess cash flow could demonstrate a robust standing to creditors and investors.


1. Apple Inc.: Recognized as one of the globe’s most cash-rich companies, Apple often has excess cash flow which they often utilize for purposes such as dividends to shareholders, stock buybacks, and making strategic acquisitions such as the purchase of Beats Electronics. Having a large amount of excess cash flow allows Apple to invest in research and development, innovate new products and also aids in maintaining financial stability.2. Amazon Inc.: Amazon perpetually generates significant excess cash flow because of its efficient operations and successful business model. Amazon reinvests most of its excess cash back into the business, notably in areas like new technology, infrastructure, and expansion into new markets. For example, its purchase of Whole Foods was largely funded by its excess cash flow.3. Berkshire Hathaway: Renowned investor Warren Buffet’s company Berkshire Hathaway often has considerable excess cash flow. This is usually used to invest in other organizations, contributing to broader portfolio diversification. For instance, they have used excess cash to acquire shares in Apple and Bank of America. Berkshire Hathaway often prefers to keep a substantial amount of this excess cash on hand for unforeseen investment opportunities or challenges.

Frequently Asked Questions(FAQ)

What is Excess Cash Flow?

Excess Cash Flow is the extra cash that a business produces over its needs to remain operational or expand. It is essentially the leftover money after all expenditures, debts, and operational costs have been paid.

How is Excess Cash Flow Calculated?

Excess Cash Flow is calculated by subtracting the capital expenditures and dividends from the ‘cash flow from operations’ figure generated by a company, typically found in its financial statements.

What Does Excess Cash Flow Indicate?

Excess Cash Flow indicates financial health and profitability. It may suggest a company is performing well, has strong revenues, and can meet its expenses. It also suggests the company has surplus cash which it can use for further investment or to repay any debts.

How can a Company Use its Excess Cash Flow?

Companies can use Excess Cash Flow in several ways including investing in new projects, paying off debts, buying back shares, paying out dividends to shareholders, or saving it for future uncertainties.

Does a Company Always Want to Have Excess Cash Flow?

While it’s generally good for a company to have Excess Cash Flow as it indicates strong performance, it may also signal inefficiency if the company consistently has a significant amount. This is because surplus cash could potentially be invested back in the business for further growth, rather than sitting idle.

What’s the Difference Between Cash Flow and Excess Cash Flow?

Cash Flow refers to the total amount of cash and cash-equivalents moving in and out of a business. Excess Cash Flow, however, is the leftover cash that remains after all business expenses, debts, capital expenditures, and dividends have been paid.

Is Excess Cash Flow the same as Free Cash Flow?

Though similar, they are not the same. Free Cash Flow is the cash a company generates through its operations, less the cost of expenditures on assets. Excess Cash Flow, on the other hand, is the surplus cash leftover after all expenses and financial commitments are covered.

Related Finance Terms

  • Working Capital: This is the difference between a company’s current assets and current liabilities. It is a measure of a company’s operational efficiency and short-term financial health.
  • Cash Flow Statement: This is one of the three essential financial statements that provide detailed information about all cash inflows a company receives from its ongoing operations and external investment sources, as well as all cash outflows that pay for business activities and investments during a given period.
  • Liquidity: This refers to the ease with which an asset or security can be converted into ready cash without affecting its market price. Excess cash flow is a sign of high liquidity.
  • Free Cash Flow (FCF): This is a measure of a company’s financial performance. It is calculated as operating cash flow minus capital expenditures. FCF represents the cash that a company is able to generate after spending the money required to maintain or expand its asset base.
  • Operating Cash Flow (OCF): This is a measure of the amount of cash generated by a company’s normal business operations. It indicates whether a company is able to generate sufficient positive cash flow to maintain and grow its operations, or it may require external financing for capital expansion.

Sources for More Information

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