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Excess cash flow is unencumbered money earned by a business after meeting financial obligations, which can be used for any purpose. It serves as a yardstick for loan repayment and can benefit finance companies linked to the business.
Excess cash flow is a term used in reference to the extra or excess cash a business earns after meeting its financial obligations. That is to say, that the excess cash flow is unencumbered money of the company as a result of its business activities, and the company can use it for any specified purpose after the usual financial obligations have been met. Some of the financial obligations that the company might have could include paying rent for its premises, money spent on purchasing raw materials, employee salaries, and paying dividends for companies with obligations to shareholders. .
This excess cash flow not only serves as an addition to the business‘s regular cash flow, but also serves as a yardstick by which creditors assign a percentage value for repayment of outstanding loans. The status quo for the repayment of any loan that may have been extended to the company by a financial institution moves upward, as the loan repayment terms at the time excess cash flow will increase to reflect the additional income and expedite loan repayment. For example, if a company was expected to repay a set percentage of the loan per month, this matrix would be adjusted by an additional percentage, the exact amount of which would be determined by a calculation of all the factors surrounding that particular company in relation to its excess cash flow.
From the above, it can be assumed that not only the company that is directly generating the funds will experience excess cash flow, as the finance company that is linked to the company in question will also experience its own increased cash inflow as result of readjusted repayment terms. For example, assuming a bank has lent money to a furniture company that has just declared excess cash flow, the bank will typically expect the furniture company to pay a set percentage of that excess cash flow to pay off the debt. outstanding that the furniture company owes to the bank. The bank can only require this payment from the furniture company when an analysis of its financial affairs reveals that the company has no other capital expenditures or other mandatory financial commitments for which it might require the money.
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