What is Cash Flow?
The net amount of cash and cash equivalents moving into and out of a property, representing the actual cash generated or consumed during a specific period after all expenses and debt service.
Understanding Cash Flow
For outdoor hospitality properties, cash flow is calculated as: Gross Revenue - Operating Expenses - Debt Service - Capital Expenditures = Cash Flow. Positive cash flow means the property generates more cash than it consumes, while negative cash flow means it requires additional capital to operate.
Cash flow is critical for several reasons:
- It represents the actual return on investment that investors receive
- It determines the property's ability to service debt
- It indicates whether additional capital is needed to operate
- It's used to calculate cash-on-cash return and other return metrics
Monthly or quarterly cash flow analysis is particularly important for outdoor hospitality properties due to seasonality. A property might have positive annual cash flow but experience negative cash flow during slow seasons, requiring cash reserves or additional financing.
Cash flow differs from Net Operating Income (NOI) in that it includes debt service and capital expenditures. NOI excludes these items, focusing purely on operational profitability. Cash flow shows what's actually available to investors after all obligations.
For leveraged investments (properties with financing), cash flow is especially important because it shows the return on the actual cash invested (down payment), not the total property value. This is the basis for cash-on-cash return calculations.
Cash flow can be improved through:
- Increasing revenue (higher occupancy, higher rates)
- Reducing operating expenses
- Refinancing to lower debt service
- Deferring non-essential capital expenditures
In feasibility studies, cash flow projections help investors understand when a property will become cash-flow positive, how much cash reserve is needed, and what returns to expect. Cash flow analysis is essential for making investment decisions and securing financing.
Sage Outdoor Advisory includes detailed cash flow analysis in our feasibility studies, helping clients understand actual returns, debt service capacity, capital requirements, and investment viability.
Examples of Cash Flow
- •A glamping resort generates $800K annual revenue, has $400K operating expenses, $180K debt service, and $50K capital expenditures. Annual cash flow = $800K - $400K - $180K - $50K = $170K. This positive cash flow means the property generates $170K annually for the investor after all obligations.
- •An RV park investor puts $500K down on a $2.5M property. Annual cash flow after all expenses and debt service is $85K. Cash-on-cash return = $85K ÷ $500K = 17%. This cash flow analysis shows the actual return on the invested capital, which is more relevant than total property ROI when using leverage.
- •A campground experiences seasonal cash flow: Summer months (June-August) generate $45K monthly cash flow, spring/fall generate $15K monthly, but winter months show -$5K monthly (negative). Annual cash flow is positive at $180K, but the property needs cash reserves to cover winter months when expenses exceed revenue.
Common Use Cases
- •Assessing actual investment returns
- •Determining debt service capacity
- •Planning cash reserves for seasonal variations
- •Evaluating investment viability and financing needs
Related Services
Frequently Asked Questions About Cash Flow
What's the difference between cash flow and NOI?
NOI (Net Operating Income) excludes debt service and capital expenditures, focusing on operational profitability. Cash flow includes debt service and capital expenditures, showing the actual cash available to investors after all obligations. Cash flow = NOI - Debt Service - Capital Expenditures.
What's a good cash flow for outdoor hospitality properties?
Good cash flow depends on the investment amount and property type. Generally, properties should generate positive cash flow that provides acceptable returns (8-15% cash-on-cash return is common). Cash flow should be sufficient to cover debt service with a margin and provide returns to investors.
How do you improve cash flow?
Cash flow can be improved by increasing revenue (higher occupancy, higher rates, additional revenue streams), reducing operating expenses, refinancing to lower debt service, or deferring non-essential capital expenditures. The most sustainable improvements come from operational efficiency and revenue optimization.
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