Unconventional Cash Flow
Candlefocus EditorUnconventional cash flow can take many forms, such as the complete reversal of a cash flow or the change in the timing and composition of inflows and outflows. For example, a company that has previously experienced an inward flow of cash (profits) may suddenly find itself with an outflow of cash (debt) due to unanticipated expenses, or an increase in capital investments. This sudden change in the direction of cash flow is an unconventional cash flow. Other examples of unconventional cash flows include dividend payments, investments, capital gains taxes and losses, sale of assets, or changes to the working capital of a company.
Unconventional cash flow can be difficult to evaluate and manage as they are not easily quantifiable or easy to understand. As such, capital budgeting becomes difficult when dealing with unconventional cash flow as the cash flows need to be properly assessed before making investment decisions. As a result, investors need to rely on more than one internal rate of return (IRR) in order to determine the expected rate of return for the project. This makes it difficult to accurately calculate the return on investment (ROI) for a project and complicates the task of assessing the risks and rewards associated with an investment.
Overall, unconventional cash flows are quite unusual and represent a special kind of cash flow pattern, with special considerations and risks that need to be taken into account. As such, investors and decision makers should be aware of the potential for unconventional cash flows, which can drastically change the expected outcome of a project or investment. Ultimately, investors would be wise to seek external guidance when evaluating and managing the cash flows of an unconventional investment.