What Is Excess Cash Flow?

Excess cash flow is a term that is used in reference to the extra or excess cash that a company makes after discharging its financial obligations. That is to say that the excess cash flow is unencumbered money accruing to the company as a result of its business activities, and the company may use it for any specified purpose after the usual financial obligations have been met. Some of the financial obligations the company might have could include the payment of rent for its premises, money spent on purchasing raw materials, salaries of the employees, and payment of dividends for companies with obligations to shareholders.

This excess cash flow not only serves as an addition to the usual cash flow of the company in question, but it also serves as a sort of yardstick by which creditors assign a percentage value for the repayment of outstanding loans. The status quo for the repayment of any loan that may have been granted to the company by a financial institution makes an upward movement as the repayment terms for the loan at the time that the excess cash flow is in place will be increased to reflect the additional income and expedite the repayment of the loan. For example, if a company was expected to pay a stated percentage of the loan per month, this matrix will be adjusted by an additional percentage, the exact amount of which will be determined by a calculation of all of the factors that surround that particular company in relation to its excess cash flow.

From the foregoing, it may be surmised that not only the company that is directly generating the funds will experience an excess cash flow since the financial company that is attached to the company in question will also experience its own surge of cash inflow as a result of the readjusted repayment terms. For instance, assuming a bank has lent money to a furniture company that has just declared an excess cash flow, the bank will typically expect the furniture company to pay a stated percentage of that excess cash flow toward servicing the outstanding debt the furniture company owes the bank. The bank may only demand this payment from the furniture company where the analysis of its financial affairs reveals that such a company has no other capital expenditures nor other obligatory financial commitments for which it might require the money.