Depreciation is inevitable when running a business. While some of your business’s assets may increase in value, others may decrease in value. The latter is known as depreciation. Whether it’s a machine, vehicle, real property or any other asset purchased by your business, its value may decrease.
In accounting, depreciation is recorded as an expense. You can write off the depreciation of an asset so that it lowers your business’s tax liabilities. Doing so essentially allows you to allocate the asset’s original cost over time. Once the asset is no longer useful for your business, its value will be zero. You can use depreciation to slowly achieve this zero value. You might be wondering, however, if depreciation will affect your business’s cash flow.
Cash Flow Explained
Cash flow is a business’s net cash for a given period. All businesses make money, and all businesses spend money. The difference between this incoming and outgoing money is cash flow. Cash flow is a financial metric for incoming and outgoing money.
If your business makes more money than what it spends, your business will have a positive cash flow. If your business spends more money than that it makes, on the other hand, your business will have a negative cash flow.
Depreciation Doesn’t Directly Affect Cash Flow
Depreciation may affect your business’s taxes, but it won’t affect your business’s cash flow. Cash flow is a measurement of how much cash flows into and out of your business. Depreciation is the loss of value involving a fixed asset. When a fixed asset becomes less valuable, it will depreciate.
In accounting, depreciation is classified as a non-cash expense. There are cash expenses, and there are non-cash expenses. Cash expenses include goods and services that your business paid for. Non-cash expenses include things like depreciation and amortization.
Depreciation Still Affects Taxes
While it doesn’t directly affect cash flow, depreciation still affects taxes. Like other expenses, it’s tax-deductible. You can write off depreciation to lower your business’s tax liabilities.
The greater the loss of value with a given asset, the more money your business will save on its tax liabilities. Depreciation won’t affect the money coming into your business, nor will affect the money leaving or going out of your business. But it can still affect your business’s tax liabilities.
What are your thoughts on depreciation and cash flow? Let us know in the comments section below!