The Relationships Between Effective Tax Rates & Cash Flow

If you own a company then you must be familiar with an effective tax rate and cash flow terms. If not, then this piece of article is going to help you out in simple words. I'm trying to make it understandable in easy wordings.

Here you go,

To understand the relationship between Cash Flow and Effective tax rate, we need to understand the difference in these two that what does they are actually.

Cash Flow: it is a net amount of cash that being transferred in and out of a company. Furthermore, receiving cash represents inflows, and total money spent is known as outflows.

Effective Tax Rate: it is actually an average tax rate that is paid by a company, corporation, or a person. It is a percentage of an annual income that is being paid as a taxpayer.

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So, both of them works parallel . There could be lower or higher effective tax rates in one's company that can impacts on cash flow.

For example, if a larger portion of the company's income going away as taxes that clearly means less cash flow while a company is always in need to pay debt off, investing, and paying dividends. This leaves bad impacts on the company reputation, its growth, and profits to shareholders.

On the other hand, lower effective tax rate means a company is paying less tax rates as a taxpayer that's why a cash flow is higher which can lead to funds growth initiatives, able to increase dividends, and paying off debt.

There are some other reasons that could impacts on company's growth such as changes in an effective tax rate. If tax law made some changes into effective tax rate that means more cash will go into tax which leads to less cash flow. In the same way, if tax rate decreases that means less payment is being spent on tax that could lead to higher cash flow in one's company which can be beneficial for its growth.

In final thoughts, an effective tax rate and cash flow are having a strong relationship that means both are directly connected with one's company situation. The higher tax rate, the less cash flow and the lower tax rate, the higher cash flow.

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