Outflow to owners can also include decapitalization from capital already in place, as in withdrawals from a bank account. | say decapitization, rather than depreciation, because the appropriate term might rather be amortization or depletion or liquidation in sale, depending on circumstances and the nature of the asset. The sum of the realized output and decapitalization can be called “gross cash flow”, meaning
gross before deducting plowback and negative cash flow (transfer in). Then
gross cash flow = cash flow + plowback + transfer in = realized output + recovered decapitalization. (6.1)
Here | specify recovered decaptalization because | treat deadweight loss as decapitalization too. Cash flow as accountants and businessmen use the term usually means gross of plowback, although net of transfer in. My meaning, net of
both, is the one always applied in finding total return and present value. Although cash flow might be in kind as well, I will follow convention by treating it as if realized from sale in cash. The owner can then spend the revenue on exhaust (pure consumption) or reinvestment or gift as she likes, but might also plow some or all back into the originating asset. The general principle is
positive cash flow = gross cash flow - plowback. (6.2) In simple cases, revenue measures and equals gross cash flow for each asset. But revenue as the term is actually used is likelier to sum contributions from many assets and owners. To keep that usual meaning separate, define this asset’s share as “earned revenue”. Then
gross cash flow = earned revenue. (6.3)
Another way to put the same idea is
Chapter 6: Parallels with the Firm 2/4/16 3
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