Negative cash flow, or transfer in, always means new investment added from outside. Plowback from revenue is excluded, as it is already recognized as a deduction from positive cash flow. For the firm, the only source of positive cash flow
is proceeds from new shares issued. With this understood,
cash flow = gross cash flow - plowback - transfer in = earned revenue - plowback - transfer in = positive cash flow - negative cash flow, (6.6)
where
positive cash flow = earned revenue - plowback, and negative cash flow = transfer in. (6.7)
Firms use the term gross realized output to mean the same thing as what I call gross
cash flow. A common definition is
gross realized output = realized output + depreciation.
Now we come to the subtle point allowing for deadweight loss. The total return truism shows that output equals value growth plus cash flow. Then output is negative wherever the sum of growth and cash flow is less than zero. Natural disasters and bad investments can make them so. Those unexpected setbacks are examples of deadweight loss. It amounts to unrecovered depreciation, meaning depreciation not recovered (realized) in positive cash flow. I'll get back to that soon.
The point at present is that the equation above really means
gross realized output = realized output + recovered depreciation.
Here too | prefer the generality of “decapitalization” over “depreciation”, and define
gross realized output = gross cash flow = realized output + recovered decapitalization = earned revenue + recovered decapitalizaton. (6.8)
Chapter 6: Parallels with the Firm 2/4/16 5
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