Optimization of financial, production and investment processes is unthinkable without a qualitative analysis. Based on the data of the studies and reports, the planning process is being carried out, the adverse factors constraining development are eliminated.
One type of assessment of the effectiveness of financial activities is the calculation of cash flow. The formula and features of the application of this technique will be presented below.
Purpose of analysis
The cash flow formula is calculated in accordance with certain methods. The purpose of this analysis is to determine the sources of cash flow to the organization, as well as their expenditures for calculating the deficit or excess of money for the study period.
To carry out such a study, a cash flow statement is generated at the enterprise. A corresponding estimate is also drawn up. With the help of such documents, it can be determined whether the available funds are sufficient for the organization of a full-fledged investment, financial activity of the company.
The study allows us to determine whether the organization is dependent on external sources of capital. It also analyzes the dynamics of the 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 the correct analysis for the possibility of 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 planning period.
Cash flows must be synchronized in terms of time of receipt and volume. Thanks to this, you can achieve good indicators of the development of the company, its financial stability. A high degree of synchronization of input and output flows allows you to speed up the implementation of tasks in a strategic perspective, reduce the need for paid (credit) sources of financing.
Management of financial flows allows you to optimize the flow of cash resources. The risk level in this case is reduced. Effective management will avoid the company's insolvency and increase financial stability.
Classification
There are 8 main criteria by which cash flows can be grouped into categories. Taking into account the methodology by which the calculation was made, gross and net cash flow are distinguished . The formula for the first approach is to summarize 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 activities of the organization, the general flow of the company is distinguished, as well as its components (for each division and economic operations).
The types of activities distinguish between production (operating), financial and investment groups. In the direction of movement distinguish between positive (incoming) and negative (retired) flow.
Considering the adequacy of funds, distinguish between excess and deficit of funds. Settlement can be made in the current or planned period. Also, threads 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 stream
One of the key indicators in the presented analysis is net cash flow. The formula of this coefficient is used in investment analysis of activities. It gives the researcher information about the financial condition of the company, its ability to increase its market value, and attractiveness to investors.
Net cash flow is calculated as the difference between the finances received and left the organization for a selected period of time. This is actually the sum between the indicators of financial, operational and investment activity.
Information on the size and nature of this indicator is used when making strategic decisions by the owners of the organization, investors and credit companies. In this case, 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 management
The cash flow ratio, the formula of which is used in the calculations by almost all large organizations, allows you to effectively manage financial flows. For calculations, it will be necessary to determine the amount of funds received and disposed of 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 the indirect and direct method. In the second case, take into account the account data of the organization. The fundamental component for conducting such a study is the indicator of sales revenue.
The method of indirect calculation involves using to analyze the article of the balance sheet, as well as a report on income and expenses of the enterprise. For analysts, this method is more informative. He will determine the relationship between profit in the study period and the amount of money the company. The impact of changes in the balance sheet assets on the net profit indicator can also be considered when using the presented methodology.
Direct calculation
If the calculation is made at a specific moment in the operating period, the current cash flow is determined . Its formula is quite simple:
ChDP = ChPO + CHF + CHI, where CHI is the net cash flow in the study period, ChPO is the flow from operating activities, CHF is from financial operations, CHI is in the context of investment activity.
To determine the net cash flow indicator, you must use the formula:
NPD = VDP - IDP, where VDP is the incoming cash flow, IDP is the outgoing cash flow.
In this case, the calculation is made for one or more billing periods. This is a simple formula. The components of 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 that are currently at the disposal of the company come from operating cash flow. The formula for calculating the net cash flow indicator (presented above) must take this value into account.
To calculate the NPI indicator, a certain formula is used:
PPI = VOS + PNA + PDFA + RA + DP - POS + ONP - PNA - PDFA - VSA, where VOS is the proceeds from the use of fixed assets, PNA is the income from the sale of intangible assets, PDFA is the income from the sale of long-term financial assets, RA - income from the sale of shares, DP - interest and dividends, PIC - fixed assets, ONP - the balance of work in progress, PNA - the purchase of intangible assets, PDFA - the purchase of long-term financial assets, ICA - the amount of repurchased own shares.
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 + BTsF - VDKD - VKKD - YES, where DVF - additional external loans, DKR - additionally attracted long-term loans, BCFR - additionally attracted short-term loans, BTsF - non-repayable targeted financing, VDKD - repayment of debt on long-term loans , VKKD - payments on short-term loans, YES - dividend payments to shareholders.
Indirect method
The indirect method of calculation also allows you to determine the net cash flow. The balance sheet formula involves adjustments. For this, data on depreciation, changes in the structure and number of current liabilities and assets are used.
The calculation of net profit from operating activities is carried out according to the following formula:
ChPO = PE + AOS + ANA - DZ - - KZ + RF, where PE - net profit of the enterprise, AOS - depreciation of fixed assets, ANA - depreciation of intangible assets, DZ - change in receivables in the study period, - change in inventories, KZ - change in the amount of accounts payable, RF - change in the reserve capital indicator.
Net cash flow is directly affected by changes in the value of the company's current liabilities and assets.
Free cash flow
Some analysts use the indicator of free cash flow in the process of studying the financial condition of an organization . The formula for calculating the presented indicator is considered in two main aspects. Distinguish between free cash flow of the company and capital.
In the first case, the indicator of the company's operating activity is considered. Fixed investment is deducted from it. This indicator provides information to the analyst about the amount of finance that remains at the disposal of the company after investing in assets. The presented methodology is used by investors to determine the feasibility of financing the activities of the company.
Free cash flow of capital involves subtracting only own investments from the total amount of the enterprise’s finances. This calculation is most often used by company shareholders. This technique is used in the process of assessing the shareholder value of an organization.
Discounting
To compare future financial payments with the current state of value, a discount technique is used. This technique takes into account that in the future, money gradually loses its value relative to the current state of the price. Therefore, the analysis uses discounted cash flow. The formula in this case contains a special coefficient. It is multiplied by the amount of financial flow. This allows you to correlate the calculation with the current level of inflation.
The discount factor is determined by the formula:
K = 1 / (1 + SD) VP, where SD is the discount rate, VP is the time period.
The discount rate is one of the most important elements in the calculation. It characterizes what income the investor will receive when investing his funds in a particular project. This indicator contains information on inflation, profitability in the context of risk-free operations, profit from increased risk. Also, in the calculations take into account the refinancing rate, the cost (weighted average) of capital, deposit interest.
Optimization Approaches
In determining the financial condition of the organization, discounted cash flow is taken into account . The formula may not take this calculation into account if the indicator is given in the short term.
The process of optimizing cash flow involves establishing a balance between the costs and revenues of the company. Deficit and excess adversely affect the financial condition and stability of the organization.
When a cash shortage occurs, liquidity indicators decrease. Solvency also becomes low. An excess of funds entails the actual depreciation of temporarily idle funds due to inflation. Therefore, company management must balance the amount of incoming and outgoing flows.
Having considered what constitutes cash flow, the formula for determining it, you can make decisions regarding the optimization of this indicator.