# Expenditure Approach Formula

Finance / August 6, 2018 / Emmalynn Leach

The amount of cash or cash-equivalent which the company receives or gives out by the way of payment(s) to creditors is known as cash flow. Cash flow analysis is often used to analyse the liquidity position of the company. It gives a snapshot of the amount of cash coming into the business, from where, and amount flowing out.

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Interest is the charge against the use of money by the borrower. The same is profit earned by the lender of money. The amount which is invested in a bank in order to earn interest is called principal. The interest rate is normally expressed in percentage and represents the dollar interest earned per \$100 of principal in a specific time, usually a year. Simple interest and compound interest are the two types of interest based on the way they are calculated.

Think of 'cash flow' as a picture of your business checking account. If more money is coming in than is going out, you are in a "positive cash flow" situation and you have enough to pay your bills. If more cash is going out than coming in, you are in danger of being overdrawn, and you will need to find money to cover your overdrafts. This is why new businesses typically need working capital, in the form of a loan or line of credit, to cover shortages in cash flow.

The asset turnover ratio, also known as the total asset turnover ratio, measures the efficiency with which a company uses its assets to generate sales. The asset turnover ratio formula is equal to net sales divided by the total or average assets of a company. A company with a high asset turnover ratio operates more efficiently compared to competitors with lower ratios.

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