Accounting and management accounting, carried out in modern conditions, is quite difficult to analyze, since the indicators that are obtained on its basis are inherently abstract quantities that are not related to real cash flows. However, investors are primarily interested in cash flows directly . This is because the presence of money at the moment for him is more important than their availability in the distant future. The profit indicator does not reflect this fact.
Thus, it is necessary to analyze in more detail the concept of cash flow and the related concept of the time value of money. Cash flows are the receipt of funds in the company’s accounts, as well as their spending, regardless of how they were extracted or spent. In fact, in modern management there are three main areas that affect cash flow.
The first area is cash flow from operating activities. In this case, the money goes to the company’s accounts as a result of sales of goods and services. The cost of money is spent on the purchase of raw materials, payment of salaries, payment of office rent, etc. Ideally, this kind of cash flow should be close to the profit of the enterprise, however, sales on credit, as well as delays in payments to suppliers are the reasons for the significant discrepancies in these figures.
In addition, investment costs and income can significantly affect cash flows. This is the second direction that is investigated in classical analysis. A company's investment is nothing more than the exchange of some assets for others, which can bring profit to the company in the long run. Such operations include, for example, the purchase of equipment for the production of goods or the purchase of shares in other companies. The cash inflows are funds received from the sale of investment assets or dividends received from them.
The third area is financial transactions. The cash inflow in this case is formed from loans taken by enterprises, and the outflow, respectively, from the funds spent on the repayment of these loans, as well as the payment of interest. Financial transactions are an important source of cash flows, especially in the initial stages of business development.
When calculating the inflow and outflow of cash, which is formed as a result of the company performing economic operations in these areas, one should not forget about the time value of money. The analysis of cash flow should be carried out taking into account exactly what period of time the funds will be received . The logic of this statement is simple. An investor can invest free money in his hands in any project, including a bank. The more time passes from the moment of investment, the greater should be the amount of money that the investor will receive in order for the investment result to exceed potential investments in other projects.
Thus, cash flows are, in classical investment management, cash recalculated taking into account current interest rates. The later the funds are received by the company, the lower their real value at the moment. This explains the fact that some companies that show good profit margins are disadvantageous for investors and may be without sources of financing. Therefore, you should not focus on planning only profit, but look at the situation through the eyes of an investor who expects to receive not only as much money as possible, but also to receive it as soon as possible.