Guide to Incremental Cash Flow

What is Incremental Cash Flow?

Incremental cash flow is the difference between a company’s projected cash flows with a project and its cash flows without the project. In other words, it isolates the financial impact of one specific decision.

Formula:

Incremental Cash Flow = Cash Flow with the Project – Cash Flow without the Project

This calculation considers all relevant cash inflows and outflows, including:

• Initial investment costs
• Operating cash flows
• Tax impacts
• Changes in working capital
• Salvage value at the end of the project
  
  

Why Incremental Cash Flow Matters

Organizations, especially those managing public funds or nonprofit budgets, use incremental cash flow to:

• Evaluate the financial viability of capital projects
• Compare multiple investment options
• Avoid overcommitting resources to underperforming initiatives

In the public sector, incremental cash flow analysis is often used when evaluating large infrastructure projects, refinancing decisions, or lease-versus-buy scenarios.

Common Mistakes to Avoid

When calculating incremental cash flow, be sure to:

• Exclude sunk costs: they’ve already occurred and don’t impact future decisions
• Include opportunity costs: the benefits lost from the next-best alternative
• Focus on cash flow, not accounting profit: non-cash items like depreciation must be adjusted
  
  

What’s important here?

Incremental cash flow helps organizations assess the true financial impact of a proposed project by focusing only on the additional cash generated or lost. It's a forward-looking tool essential for smart budgeting, capital planning, and resource allocation, especially in environments where every dollar must be justified. 

When decision-makers use incremental cash flow analysis, they can more confidently determine which projects are worth pursuing.