Optimization of financial, production and investment processes is unthinkable without qualitative analysis. Based on the data of the conducted studies and reports, a planning process is being carried out, and adverse factors hindering development are being eliminated.
One of the types of evaluation of financial performance is the calculation of cash flow. The formula and features of the application of this technique will be presented below.
Purpose of analysis
Cash flow formula is calculated according to certain methods. The purpose of such an analysis is to determine the sources of cash inflow to the organization, as well as their expenditure to calculate the deficit or excess of money for the period under study.
To carry out such a study, the company generates a cash flow statement. A corresponding estimate is also drawn up. With the help of such documents, it is possible to determine whether the available funds are sufficient to organize the full-fledged investment and financial activities of the company.
Ongoing research allows us to determine whetherwhether the organization is dependent on external sources of capital. It also analyzes the dynamics of receipt and disposal of funds in the context of each type of activity. This allows you to develop a dividend policy, to predict it in the future period. Cash flow analysis aims to determine the actual solvency of the organization, as well as its forecast in the short term.
What does the calculation give?
Cash flow, the calculation formula of which is presented in various methods, requires proper analysis for effective management. In the case of the presented study, the organization gets the opportunity to maintain a balance of its financial resources in the current and planned period.
Cash flows must be synchronized in terms of their time of receipt and volume. Thanks to this, it is possible to achieve good indicators of the company's development, its financial stability. A high degree of synchronization of incoming and outgoing flows makes it possible to accelerate the execution of tasks in a strategic perspective, reduce the need for paid (credit) sources of financing.
Finance flow management allows you to optimize the use of financial resources. The level of risk in this case is reduced. Efficient management will avoid the company's insolvency, increase financial stability.
Classification
There are 8 main criteria by which cash flows can be grouped into categories. Taking into account the method by which the calculation was made,Distinguish between gross and net cash flow. The formula for the first approach involves summing up all the cash flows of the enterprise. The second method takes into account the difference between income and expenses.
According to the scale of influence on the economic activity of the organization, the general flow for the company, as well as its components (for each division and economic operations) are distinguished.
By type of activity, production (operational), financial and investment groups are distinguished. In the direction of movement, a positive (incoming) and negative (outgoing) flow is distinguished.
Considering the sufficiency of funds, a distinction is made between excess and shortage of funds. The calculation can be made in the current or planned period. Also, flows can be classified into discrete (one-time) and regular groups. Capital can flow in and out of the organization at the same time interval or randomly.
Clean flow
One of the key indicators in the presented analysis is net cash flow. The formula of this coefficient is used in the investment analysis of activities. It gives the researcher information about the company's financial condition, its ability to increase its market value, and its attractiveness to investors.
Net cash flow is calculated as the difference between the funds received and withdrawn from the organization for a selected period of time. This is actually the sum between the financial, operatingand investment activities.
Information about the size and nature of this indicator is used by the owners of the organization, investors and credit companies when making strategic decisions. At the same time, it becomes possible to calculate whether it is advisable to invest in the activities of a particular enterprise or in a prepared project. The presented coefficient is taken into account when calculating the value of the enterprise.
Flow control
The cash flow ratio, the formula of which is used in calculations by almost all large organizations, allows you to effectively manage financial flows. For calculations, it will be necessary to determine the amount of incoming and outgoing funds for a specified period, their main components. Also, the breakdown is carried out in accordance with the type of activity that generates a certain movement of capital.
Calculation of indicators can be done in two ways. They are called indirect and direct methods. In the second case, the data of the organization's accounts are taken into account. The fundamental component for conducting such a study is the indicator of sales revenue.
The method of indirect calculation involves the use of balance sheet items for analysis, as well as a statement of income and expenses of the enterprise. For analysts, this method is more informative. It will allow you to determine the relationship between profit in the study period and the amount of money of the enterprise. The impact of changes in balance sheet assets on the net profit indicator is alsoit will be possible to consider using the presented methodology.
Direct settlement
If the settlement is made at a specific point in the operating period, the current cash flow is determined. Its formula is quite simple:
NPV=NPO + NPF + NPI, where NPV is net cash flow in the study period, NPV is a cash flow from operating activities, NPF is from financial transactions, NPI is in the context of investment activities.
To determine the net cash flow, you must use the formula:
NPV=ICF - ICF, where ICF is the incoming cash flow, ICF is the outgoing cash flow.
In this case, the calculation is made for one or more calculation periods. This is a simple formula. The components from each type of activity must be calculated separately. In this case, it is necessary to take into account all the components.
Calculation of net investment flow
The bulk of the organization's funds at the disposal of the company at the moment comes from operating cash flow. The formula for calculating the net cash flow (presented above) necessarily takes into account this value.
To calculate the NPI, a certain formula is applied:
NPI=VOS + PNA + PDFA + RA + DP - PIC + SNP - PNA - PDFA - VSA, where VOS - revenue received from the use of fixed assets, PNA - income from the sale of intangible assets, PDFA - income from sale of long-term financialassets, RA - income from the sale of shares, DP - interest and dividends, PIC - acquired fixed assets, COP - work in progress, PNA - purchase of intangible assets, PDFA - purchase of long-term financial assets, TSAR - amount of treasury shares repurchased.
Calculation of net cash flow
The cash flow formula uses net cash flow data. The calculation is made according to the following formula:
NPF=DVF + DDKR + DKKR + BTF – FDD – FKKD – YES, where DVF – additional external financing, DKR – additional attracted long-term loans, DKKR – additional attracted short-term loans, BCF – non-repayable targeted financing, FDD – debt repayments on long-term loans, VKKD - payments on short-term loans, YES - dividend payments to shareholders.
Indirect method
The indirect calculation method also allows you to determine the net cash flow. The balance formula involves adjustments. For this, data on depreciation, changes in the structure and number of current liabilities and assets are used.
Calculation of net profit from operating activities is made according to the following formula:
NPO=PE + AOS + ANA - DZ - Z - KZ + RF, where NP - net profit of the enterprise, AOS - depreciation of fixed assets, ANA - depreciation of intangible assets, DZ - change in receivables in the study period, Z - change in reserves, KZ - change in the amount of accounts payable, RF - change in the indicator of reserve capital.
On netcash flow is directly affected by changes in the value of the company's current liabilities and assets.
Free cash flow
Some analysts use the free cash flow indicator in the process of studying the financial condition of an organization. The formula for calculating the presented indicator is considered in two main aspects. A distinction is made between the free cash flow of a firm and capital.
In the first case, the indicator of the company's operating activity is considered. It subtracts investment in fixed assets. This indicator provides information to the analyst about the amount of finance that remains at the disposal of the company after investing capital in assets. The presented methodology is used by investors to determine the feasibility of financing the company's activities.
Free cash flow of capital involves subtracting from the total amount of the company's finances only its own investments. This calculation is used most often by the shareholders of the company. This technique is used in the process of assessing the shareholder value of the organization.
Discounting
To compare future financial payments with the current state of value, a discounting technique is applied. This technique takes into account that in the long term, money gradually loses its value relative to the current state of the price. Therefore, discounted cash flow is used in the analysis. The formula contains a special coefficient. It is multiplied by the amount of the cash flow. This allows you to correlate the calculation with the current level of inflation.
Coefficientdiscounting is determined by the formula:
K=1/(1 + SD)VP, where SD is the discount rate, IP is the time period.
The discount rate is one of the most important elements in the calculation. It characterizes how much income an investor will receive when investing his funds in a particular project. This indicator contains information about inflation, profitability in the context of risk-free operations, profit from increased risk. Also, the calculations take into account the refinancing rate, the cost (weighted average) of capital, deposit interest.
Optimization approaches
When determining the financial condition of an organization, discounted cash flow is taken into account. The formula may not take into account this calculation if the indicator is given in the short term.
The cash flow optimization process involves establishing a balance between the company's expenses and income. Scarcity and surplus negatively affect the financial condition and stability of the organization.
When there is a shortage of funds, liquidity ratios decrease. Solvency also becomes low. An excess of funds entails the actual depreciation of temporarily idle funds due to inflation. Therefore, the company's management must balance the amount of incoming and outgoing flows.
Having considered what constitutes a cash flow, the formula for its definition, you can make decisions on optimizing this indicator.
