Warren Buffet's view on Cash Flow - the (c) ...

Valuing a business based on cash flow is a wide spread method - .. Here comes a great add on from Warren Buffet, by many people regarded as THE #1 business man in the world today and share holder in Berkshire Hathaway, a really ugly web page with great content.

Most Peoples view on Cash Flow: (a) operating earnings and adding back (b) non-cash charges.

Mr Buffet view on Cash Flow: You must also subtract something else: (c) required reinvestment in the business.

Mr Buffet's definition of (c) required reinvestment:
"The average amount of capitalized expenditures for plant and equipment etc., that the business requires to fully maintain it's long-term competitive position and it's unit volume". Mr Buffet calls the result of (a) + (b) - (c) = "owners earning"

Mr Buffet's powerful summary and key takeaway for you and me
If (b) and (c) differ, cash flow analysis and owner earnings analysis differ too. For most business (c) actually exceeds (b), thus cash flow analysis usually overstates economic reality. Think about that one and relate it to your business...