Cash flow from investing activities. Cash flows of an investment project Cash inflows from investment activities

Optimization of financial, production and investment processes is unthinkable without quality analysis. Based on data from studies and reports, the planning process is carried out, and unfavorable factors hindering development are eliminated.

One of the types of assessing the effectiveness of financial activities is the calculation cash flow. Formula and the features of the application of this technique will be presented below.

Purpose of analysis

Cash flow formula calculated in accordance with certain methods. The purpose of such an analysis is to determine the sources of income Money to the organization, as well as their expenditure to calculate the deficit or surplus of money for the period under study.

To carry out such a study, the company prepares a cash flow statement. An appropriate estimate is also drawn up. With the help of such documents, it is possible to determine whether the existing funds available are sufficient to organize full-fledged investment and financial activities of the company.

The conducted research allows us to determine whether the organization is dependent on external sources of capital. The dynamics of inflow and outflow of funds in the context of each type of activity is also analyzed. This allows you to develop a dividend policy and predict it in the future. 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, calculation formula which is presented in various methods, requires proper analysis for effective management. If the presented study is carried out, the organization has the opportunity to maintain a balance of its financial resources in the current and planned periods.

Cash flows must be synchronized in their arrival time and volume. Thanks to this, it is possible to achieve good indicators of the company’s development and its financial stability. A high degree of synchronization of input and output flows allows you to speed up the execution of tasks in a strategic perspective and reduce the need for paid (credit) sources of financing.

Managing financial flows allows you to optimize the consumption of financial resources. The level of risk in this case is reduced. Effective management will help avoid company 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, a distinction is made between gross and for the first approach it involves summing up all the cash flows of the enterprise. The second method takes into account the difference between income and expenses.

Based on the scale of influence on the economic activity of an organization, a distinction is made between the overall flow for the company, as well as its components (for each division and economic operations).

Based on the type of activity, a distinction is made between production (operational), financial and investment groups. Based on the direction of movement, a distinction is made between positive (incoming) and negative (outgoing) flow.

When considering the sufficiency of funds, a distinction is made between surplus and deficit of funds. The calculation can be made in the current or planned period. Flows can also be classified into discrete (one-time) and regular groups. Capital can flow in and out of an organization at regular intervals or randomly.

Clean flow

One of the key indicators in the presented analysis is Net cash flow. Formula 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 those leaving the organization for a selected period of time. This is actually the sum between financial, operating and 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 specific enterprise or in a prepared project. The presented coefficient is taken into account when calculating the value of the enterprise.

Thread management

Cash flow ratio, formula which is used in calculations by almost all large organizations, allows you to effectively manage financial flows. For calculations, you will need to determine the amount of incoming and outgoing funds for a specified period, their main components. The breakdown is also carried out in accordance with the type of activity that generates a certain capital flow.

Calculation of indicators can be done in two ways. They are called the indirect and direct method. In the second case, the organization’s account data is taken into account. The fundamental component for conducting such a study is the sales revenue indicator.

The indirect calculation method is intended to be used to analyze the article balance sheet, as well as a statement of income and expenses of the enterprise. For analysts, this method is more informative. It will allow us to determine the relationship between profit in the period under study and the amount of money of the enterprise. The impact of changes in balance sheet assets on the indicator net profit It will also be possible to consider when using the presented methodology.

Direct calculation

If the calculation is made at a specific moment it is determined current cash flow. Formula its quite simple:

NPV = NPV + NPF + NPI, where NPV is the net cash flow in the period under study, NPV is the flow from operating activities, NPF is from financial transactions, NPV is in the context of investment activities.

To determine net cash flow, you must use the formula:

NPV = VDP - IDP, where VDP is the incoming flow of money, IDP is the outgoing flow of funds.

In this case, the calculation is made for one or several billing periods. It's 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 in this moment, comes from operating cash flow. Formula the calculation of the net indicator (presented above) necessarily takes this value into account.

NPI = BOS + PNA + PDF + RA + DP - POS + ONP - PNA - PDF - VSA, where BOS is revenue received from the use of fixed assets, PNA is income from the sale of intangible assets, PDF is income from the sale of long-term financial assets, RA - income from the sale of shares, DP - interest and dividends, POS - acquired fixed assets, ONP - balance of work in progress, PNA - purchase of intangible assets, PDFA - purchase of long-term financial assets, VSA - the amount of purchased own shares.

Calculation of net financial flow

Cash flow formula applies data on the net calculation is made using the following formula:

NPF = DVF + DDKR + DKKR + BCF - VDKD - VKKD - YES, where DVF is additional external financing, DDKR - additionally attracted long-term loans, DKKR - additionally attracted short-term loans, BCF - irrevocable targeted financing, VDKD - debt payments under VKKD - payments on short-term loans, YES - dividend payments to shareholders.

Indirect method

Indirect also allows you to determine pure cash flow. Balance formula involves making adjustments. For this purpose, data on depreciation, changes in the structure and quantity of current liabilities and assets are used.

Net profit from operating activities is calculated using the following formula:

NPO = PE + AOS + ANA - DZ - Z - KZ + RF, where PE is the net profit of the enterprise, AOS is the depreciation of fixed assets, ANA is the amortization of intangible assets, DZ is the change in accounts receivable in the period under study, Z is the change in inventories, KZ - change in quantity accounts payable, Russian Federation - change in 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 in the process of studying the financial condition of an organization free cash flow. Formula The calculation of the presented indicator is considered in two main aspects. A distinction is made between free cash flow of the firm and capital.

In the first case, the company's operating performance indicator is considered. Investments in fixed assets are subtracted from it. This indicator provides information to the analyst about the amount of finance that remains at the company's disposal 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 only the company's own investments from the total finances of the enterprise. This calculation is most often used by the company's 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, the discounting technique is used. This technique takes into account that in the long term money gradually loses its value relative to the current state of the price. Therefore, the analysis uses discounted cash flow. Formula it also contains a special coefficient. It is multiplied by the amount of financial flow. This allows us to compare 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 an investor will receive when investing their funds in a specific project. This indicator contains information about inflation, profitability in terms of risk-free operations, and profit from increased risk. The calculations also take into account the refinancing rate, the cost (weighted average) of capital, and deposit interest.

Optimization approaches

When determining the financial condition of an organization, they take into account discounted cash flow. Formula may not be taken into account if the indicator is given in the short term.

The process of optimizing cash flow involves establishing a balance between the company's expenses and income. Deficiency and excess negatively affect financial condition and stability of the organization.

When a cash shortage occurs, liquidity indicators decrease. Solvency also becomes low. Excess funds entail 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 it is cash flow formula its definition, decisions can be made on optimizing this indicator.

Enterprise operations including the acquisition and sale of intangible assets, shares of shares in the conditional capital of joint ventures, other securities (not being short-term investments), as well as the issuance of long-term loans to other enterprises and individuals and their subsequent return, represent the main components of its investment activities. .

Investment activities are related to the sale and acquisition of long-term use property

Cash flows arising from investing activities reflect the level production costs on resources intended to generate income and future cash flow.

Cash flow from investment activities summarized in the section “Investment activities”

Cash flows from investing activities include:

For example, an enterprise receives income from the operation of acquired fixed assets not immediately after their purchase, but throughout the entire period of their purchase, but during the entire period of their operation. Likewise long-term securities may generate future dividend income and influence future cash flows through the amount of dividends received.

We will analyze the cash flow for investment activities at the Zhemchuzhina LLC enterprise for three years (2004-2006)

Table No. 2

Analysis of cash flows for investment activities

Indicators			Off(+/-) 2004-2005	Off(+/-) 2005-2006
Receipt of DS, total

Interest received
Dividends received
Including from abroad
Other supply
DS expenses, total	18
Cash payments for the purchase of long-term assets
Net receipts (disposals) of VA from investment activities	*- 18*	*138*		*-138*

From table No. 2 and diagram No. 2 it is clear that Zhemchuzhina LLC in 2005, compared to 2004, increased its sales income due to the disposal of long-term assets (81 thousand lei) and other income.

Cash expenses at the enterprise also decreased slightly (- 6 thousand lei) associated with the acquisition of long-term assets.

And in 2006, no investment operations were carried out.

Income from investment property Disposal from investment property

Diagram No. 2. Analysis of cash flows for investment activities

As follows from Table No. 2, Zhemchuzhina LLC does not use the funds received to purchase fixed assets, which would normally be reflected as a negative flow from investment activities. Lack of proper attention to this aspect can provoke difficulties in the process of carrying out operational activities due to insufficient technical potential.

Financial activity of the enterprise- this is a set of operations related to raising capital to finance its activities. The result of financial activity is a change in the size and composition of the enterprise's own and borrowed capital.

Financial activity is an activity the results of which is a change in the size and composition of the equity capital and borrowed funds of the enterprise.

An enterprise is considered to carry out financial activities if it receives resources from investors and owners, returns them, receives and repays loans and pays dividends.

Cash inflows and outflows associated with financial transactions are highlighted in a separate section of the report because this information allows us to predict the future amount of cash to which investors will be entitled.

Cash flows from financing activities are summarized in section "Financial activities".

Information about cash flows as a result of financial activities is very important, as it allows users of financial statements to find out why the company's equity increased or decreased, what changes and why occurred in the amount and composition of long-term and short-term liabilities. In addition, this information is useful in forecasting future cash flow requirements from investors and creditors. Financial activities are designed to increase the funds at the disposal of the enterprise for financial support of operating and investment activities.

For each area of activity it is necessary to sum up the results. It is bad when operating activities are dominated by cash outflows; this indicates that the funds received are not sufficient to ensure the current payments of the enterprise.

Cash flows from financing activities include:

In this case, the lack of funds for current expenses will be covered by borrowed resources. If, in addition, there is an outflow of funds from investment activities, then the financial independence of the enterprise decreases.

We will analyze the cash flow for financial activities at the Zhemchuzhina LLC enterprise for three years (2004-2006)

The data provided in table No. 3 allows us to see that cash receipts from financial activities were associated only with obtaining loans and credits. This is due to the fact that due to a shortage of funds for the operating activities of Zhemchuzhina LLC, it is necessary to attract additional funds to cover its expenses

Table No. 3

Cash flow analysis for financial activities

Indicators				Off(+/-) 2004-2005	Off(+/-) 2005-2006
DS receipts, total	*12 588*	*12 260*		*- 328*	*- 4 923*
Cash payments in the form of loans and borrowings
Cash receipts from the issue of own shares
DS consumption, total		*9 589*	*10 810*	*+ 3 239*	*+ 1 221*
Cash payments on loans and borrowings
Dividend payments
Including nerez.
Cash payments upon repurchase of private shares
Other DS payments
Net receipts (payments) of DS	*6 237*	*21 671*		*+15 433*	*-6 144*

Although it must be said that from year to year loans and borrowings are decreasing, in 2005 compared to 2004 by 327,770 lei, and in 2006 compared to 2005 by 4,922,790 lei. But as can be seen from the table data, this led to the emergence of a negative net inflow (outflow) of funds from financial activities.

Receipt from financial Disposal from financial

activity (thousand l.) activity (thousand l.)

Diagram No. 3. Analysis of cash flows from financial activities.

From the above diagrams it is clear, as well as the balance sheet data of the enterprise, confirmed that the loans received are short-term in nature and cause their rapid repayment. Consequently, due to a lack of funds, the enterprise Zhemchuzhina LLC is not able to issue or buy back its own shares.

All three types of activities we have considered form a single sum of the enterprise’s monetary resources, the normal functioning of which is impossible without the constant flow of cash flows from one area to another. The very existence of the three areas of the organization’s activities is aimed at ensuring its performance. Even profitable production - economic activity may not always bring in a sufficient amount of money to purchase non-current assets(real estate or equipment). In such situations, new loans are necessary, the cost of which must be offset by future investment income. In the context of a non-payment crisis, enterprises are forced to seek additional short-term financing working capital. But expenses for such purposes cannot be offset by future income, since the money was not used for investment.

We will carry out a structural analysis of cash flow at the Zhemchuzhina LLC enterprise.

Structural analysis provides users of financial statements with detailed information regarding the origin of cash flows and their further use. The analysis examines the relationships between various channels of cash inflow and outflow. Structural analysis allows you to evaluate the contribution of each component element of cash flow in the formation of the overall flow.

IN economic theory and economic practice, two technical methods of implementation are used structural analysis cash flows. The essence of the first method is a separate study of the structure of cash receipts and payments, calculating the share of each component element in the total amount of receipts and payments, respectively. When applying this method in the process of preparing analytical materials, pie charts are often constructed, with the help of which the structure of cash flows is presented in a more accessible form.

Based on the cash flow statement data for the last two years, we will compose an analytical table, construct diagrams and interpret the results obtained.

Using the data from column 6 of table No. 4, we present the structure of cash flows at the Zhemchuzhina LLC enterprise in the reporting year using diagram No. 4. In 2004, the main elements forming the cash flow at the Zhemchuzhina LLC enterprise are sales receipts (44.84%). Receipts in the form of loans and borrowings amount to 38.39%, and other receipts - 16.77%. this speaks about efficient functioning enterprises.

Table No. 4

Separate analysis of the structure of cash receipts and payments

	Money


Cash receipts
	Sales proceeds
	Other income from operating activities.
	Receipts in the form of loans and borrowings
	Cash proceeds from disposal of long-lived assets
Total cash receipts			*19 378*
	Cash payments
	Payments to suppliers
	Payments to staff
	Payment %
	Income tax payments
	Other operating payments
	Payments on loans and borrowings
	Cash payments for the acquisition of long-term assets
Total cash payments	*32 677*	*100*	*18 304*

Diagram No. 4. Cash receipts and payments at the enterprise Zhemchuzhina LLC in 2006.

From the data in table No. 4 and the information presented in diagram No. 4, it follows that a significant part of payments falls on suppliers (61.25%), 19.45% - on payments on loans and borrowings, 14.2% - on other operating expenses, and the rest is the share of payments to staff (2.11%), interest payments (2.55%)

In 2005, receipts from sales decreased to 36.57%, and receipts in the form of loans and borrowings increased to 56.11%.

In 2006, as in 2004, receipts from sales were higher (than receipts in the form of loans and borrowings (37.86%)

In 2005, most of the payments go to repay loans and borrowings (44.06%), and in 2006 this item accumulates the principal amount - 52.18% of the total amount of payments. The share of suppliers accounts for 39.97% in 2005, and in 2006 - 37.93%.

Among the structural changes, the emergence of income tax payments in the reporting year, the share of which amounted to 0.03% of the total amount of cash payments, stands out.

The political factor, as mentioned above, significantly influenced operational activities. Consequently, this is what provoked the enterprise Zhemchuzhina LLC to acquire a larger loan, which attracts an annual increase in loan payments.

Having analyzed three recent years functioning of Zhemchuzhina LLC, we can come to the conclusion that the situation regarding the inflow and outflow of funds is quite stable. This is due to the fact that the enterprise has specialists who try to use funds efficiently, control both the flow and outflow, thereby trying to sustain the enterprise during the crisis and prevent it from going bankrupt.

Among the structural changes, the emergence of income tax payments in the reporting year, the share of which amounted to 0.03% of the total amount of cash payments, stands out. In the long term, the direct method of calculating the amount of cash flows makes it possible to assess the level of liquidity of the enterprise.

Let's analyze cash flow using the coefficient method. This method is often used in foreign analytical practice to assess the situation regarding cash flows. The peculiarity of the method is the calculation of financial ratios, which reflect the various ratios between received and used funds. These ratios are very numerous and varied, but for the most part, they characterize the ability of the enterprise to satisfy certain needs due to the availability of funds.

In particular, using this method in the analysis of cash flows, the coefficients presented in table No. 5 can be calculated.

The results of the analysis (conducted in table No. 5) indicate that the level of cash flow adequacy at the Zhemchuzhina LLC enterprise has sharply increased.

Table No. 5

Analysis of cash flow ratios for Zhemchuzhina LLC

Diagram No. 5

If in 2004 the enterprise generated, as a result of operating activities, a net operating flow, which was one time less than what the enterprise required, then in 2006. The situation has developed that the company satisfies its needs almost 100%. This is due to the fact that Zhemchuzhina LLC used a loan.

Diagram No. 6

As can be seen from diagram No. 6, calculation of the degree of coverage of cash flow obligations shows that during 2004. and 2005 the situation is characterized by the absolute inability of the enterprise to repay debts without external financing. In 2006 The enterprise Zhemchuzhina LLC, with the help of cash received from operating activities, covered 11% of the total amount of liabilities existing at the end of the year. This indicates that the company has become more creditworthy.

The absolute liquidity sufficiency ratio of assets at the Zhemchuzhina LLC enterprise is at a very low level.

Diagram No. 7

If in 2005 it increased by 3.74 days (from 1.66 in 2004 to 6.21 in 2005), then in 2006 decreased significantly at the end of 2006. The enterprise Zhemchuzhina LLC has absolutely liquid assets in an amount that would allow the average operational payments to be made within 0.70 days.

Diagram No. 8

From the calculations made in table No. 5 and diagram No. 8, it follows that the degree of reinvestment of funds into the enterprise Zhemchuzhina LLC in 2005. (18.01%) exceeded the recommended level (8-10%).

And in 2004 and 2006 reinvestment of funds did not take place at all due to the formation of an operational clean flow from operating activities.

In the long term, the direct method of calculating the amount of cash flows makes it possible to assess the level of liquidity of the enterprise.

In operational financial management, the direct method can be used to monitor the process of generating revenue from the sale of products (works, services) and draw conclusions regarding the adequacy of funds to pay financial obligations.

The disadvantage of this method is that it does not take into account the relationship between the obtained financial result (profit) and changes in the absolute amount of funds of the enterprise.

During the operation of an enterprise or during the implementation of projects, incoming and outgoing cash flows are generated. Their focus and the predominance of some over others indicates how successful the project is and what to expect from it in the future. Let's consider how cash flow from a company's investment activities is formed and how important it is in its activities.

Investment cash flow among other cash flows

When conducting a preliminary assessment and analysis of an investment project, the most important condition is the calculation of expected cash flows (cash flow, or cash flow). Each calculation step over a given period of time is characterized by the following cache flow indicators:

receipts of funds (inflow);
expenses in the form of payments;
the difference between income and expenses (balance, balance).

The cash flow of an investment project is considered as a summary indicator of flows created by various types of activities:

Operating room (internal, main). It affects the production sector (purchase necessary materials, parts, raw materials, energy supply, remuneration of workers, transfer of taxes, sale of the manufactured product).
Financial. The basis here is working with external finances. This is the issue, sale and purchase of securities, payment of dividends, attraction of grants, loans, subsidies, etc.
Investment. In this direction, work is carried out with assets (their acquisition, modernization, expansion and sale).

Not owning complete information about the expected movement of cash flows, it is impossible to correctly calculate the discounted value of the investment project, and without such an analysis, investing in the proposed undertaking is inappropriate.

How is investment financial flow formed?

Investment cash flo often has negative indicator, since it mainly contains the costs of implementing the initiative, as well as its expansion and modernization during implementation. It is usually offset by income received from the main activity of the enterprise (sale of goods or services).

Outflows consist of the following items:

capital investments (research, development and construction work);
purchase and installation of necessary equipment;
acquisition of intangible assets (copyrights, licenses, permits, rights to use something, for example, a land plot);
commissioning works;
expenses for performing work to liquidate the facility (environmental measures, reclamation, etc.);
expenses aimed at increasing working capital.

Also included in outflows are a number of non-capitalized expenses (costs for external infrastructure facilities, taxes on the land plot used for the project). If we are talking about capital construction, then investment investments must always be linked to the construction schedule. Investment costs are classified by type of expense.

Tributaries characteristic of this direction consist of:

Income received from the sale of enterprise assets (surplus equipment or raw materials, unused buildings or premises) is most often sold after the project is closed, although this often occurs during its implementation. In particular, if part of the equipment is no longer used in the production process, then it can be sold, the same can be said about excess production and auxiliary space.
Funds received from the sale of intangible assets (copyrights, intellectual property). Such transactions occur infrequently, but lead to significant inflows of funds.
Income as a result of a decrease in working capital.

This can also include non-operating income of the company. For example, a company deposited temporarily unused money into a bank deposit account. In this case, interest on the deposit belongs specifically to the investment monetary sphere, while the return of the principal amount of the deposit belongs to the financial sphere.

As you can see above, the inflow and outflow of money is affected by the dynamics of changes in working capital. At its core, the amount of net working capital is the difference between cash assets and liabilities for this moment time. When carrying out calculations, the following criteria are mainly used:

current standardized liabilities, which include accounts payable;
current normalized assets, including accounts receivable, inventories and work in progress.

Consequently, when forming reserves of materials and raw materials for production needs, finances are spent for this (outflow occurs), thus increasing fixed capital. If inventories in such quantities are no longer needed, then part of them is sold (an influx occurs), and working capital decreases.

How is investment cash flo calculated?

To calculate cash flows from investment activities, experts recommend using a special table in which costs and revenues are entered for each step with the appropriate sign.

№	Indicator name	Step 0	Step 1	Step 2	Step 3	Step...
1	Total inflows of funds, including:
1.1	Income from the sale of fixed assets (after taxes)
1.2	Income from the sale of intangible assets and/or fixed assets after completion of the investment project (liquidation value)
1.3	Return of current assets at the end of the project (salvage value)
2	Total cash outflows, including:
2.1	Investment costs (total capital investments), incl.
	investments in fixed assets
	expenses on intangible assets
	expenses on non-current assets (commissioning and other work, non-capitalized costs, replacement of fixed assets, increase in working capital)
2.2	Liquidation costs
2.3	Cash investments in other funds (purchase of stocks and bonds, deposits)
3	Balance on investment activities

When compiling an information table, you need to take into account the following nuances:

The entire period of implementation of the initiative is divided into segments (steps), according to which economic and financial indicators are assessed. Most often, such a period is taken to be a calendar year, although in short- or medium-term endeavors the step may be a quarter or a month.
The positions indicated in the table can be detailed depending on specific conditions.
Costs and revenues are indicated in the currency in which they were incurred, at current prices.
The last steps are characterized by the fact that they should take into account the costs of liquidating the enterprise (environmental measures, dismantling of equipment).
It is advisable to establish the level of income from the sale of remaining fixed assets during the liquidation of the project using a forecast estimate, which may not coincide with the residual value of the specified property.

In fact, without the investment component, the implementation of the project is not possible. In order to subsequently receive income, you first need to finance the purchase or rental land plot or suitable premises, purchase of equipment, transport, machinery, raw materials, required permits and licenses. Therefore, the curve on the graph at the initial stage goes down sharply, and only after the start of production and the enterprise reaching its design capacity, revenues begin to gradually cover costs.

If the project is long-term, then investments can be made in parts. After a large initial investment, there may be a need for modernization or technical re-equipment to expand the range of products, replace failed equipment, as well as vehicles. Here great importance has the specifics of the enterprise. If there are available funds, they can be invested in securities or in the authorized capital of other business entities (purchase of a share or the entire company), as well as issue a loan to another company; this can also be attributed to the outflow of investment activities.

An investor can invest money in the securities of a company and not take part in its activities, agreeing to receive an agreed amount of dividends annually, in which case his income is called passive income. If an investor is on the board of directors and participates in making important decisions that affect the amount of profit, then his income from the investment becomes active.

Let's analyze the types of cash flows of an enterprise: the economic meaning of the indicators - net cash flow (NCF) and free cash flow, their construction formula and practical examples of calculation.

Net cash flow. Economic sense

Net cash flow (EnglishNetCashflow,NetValueNCF, present value) – is a key indicator of investment analysis and shows the difference between positive and negative cash flow for a selected period of time. This indicator determines the financial condition of the enterprise and the ability of the enterprise to increase its value and investment attractiveness. Net cash flow is the sum of the cash flow from the operating, financing and investing activities of an enterprise.

Consumers of the net cash flow indicator

Net cash flow is used by investors, owners and creditors to evaluate the effectiveness of an investment in an investment project/enterprise. The value of the net cash flow indicator is used in assessing the value of an enterprise or investment project. Since investment projects can have a long implementation period, all future cash flows lead to the value at the present time (discounted), resulting in the NPV indicator ( NetPresentValue). If the project is short-term, then discounting can be neglected when calculating the cost of the project based on cash flows.

Estimation of NCF indicator values

The higher the net cash flow value, the more investment attractive the project is in the eyes of the investor and lender.

Formula for calculating net cash flow

Let's consider two formulas for calculating net cash flow. So net cash flow is calculated as the sum of all cash flows and outflows of the enterprise. And the general formula can be represented as:

NCF – net cash flow;

C.I. (Cash Inflow) – incoming cash flow, which has a positive sign;

CO (Cash Outflow) – outgoing cash flow with a negative sign;

n – number of periods for assessing cash flows.

Let us describe in more detail the net cash flow by type of activity of the enterprise; as a result, the formula will take the following form:

Where:

NCF – net cash flow;

CFO – cash flow from operating activities;

CFF – cash flow from financing activities;

Example calculation of net cash flow

Let's look at a practical example of calculating net cash flow. The figure below shows the method of generating cash flows from operating, financing and investing activities.

Types of cash flows of an enterprise

All cash flows of an enterprise that form net cash flow can be divided into several groups. So, depending on the purpose of use, the appraiser distinguishes the following types of cash flows of an enterprise:

FCFF is the free cash flow of the company (assets). Used in valuation models for investors and lenders;
FCFE – free cash flow from capital. Used in models for assessing value by shareholders and owners of the enterprise.

Free cash flow of the company and capital FCFF, FCFE

A. Damodaran distinguishes two types of free cash flows of an enterprise:

Free cash flow of the company (FreeCashFlowtoFirm,FCFFFCF) is the cash flow of an enterprise from its operating activities, excluding investments in fixed capital. A firm's free cash flow is often simply called free cash flow, i.e. FCF = FCFF. This type cash flow shows how much cash the company has left after investing in capital assets. This flow is created by the assets of the enterprise and therefore in practice it is called free cash flow from assets. FCFF is used by the company's investors.
Free cash flow to equity (FreeCashFlowtoEquity,FCFE) is the cash flow of an enterprise only from the equity capital of the enterprise. This cash flow is usually used by the company's shareholders.

A firm's free cash flow (FCFF) is used to assess enterprise value, while free cash flow to equity (FCFE) is used to assess shareholder value. The main difference is that FCFF evaluates all cash flows from both equity and debt, while FCFE evaluates cash flows from equity only.

The formula for calculating the free cash flow of a company (FCFF)

EBIT ( Earnings Before Interest and Taxes) – earnings before taxes and interest;

СNWC ( Change in Net Working Capital) – change in working capital, money spent on the acquisition of new assets;

Capital Expenditure) .

J. English (2001) proposes a variation of the formula for a firm's free cash flow, which is as follows:

CFO ( CashFlow from Operations)– cash flow from the operating activities of the enterprise;

Interest expensive – interest expenses;

Tax – interest rate income tax;

CFI – cash flow from investment activities.

Formula for calculating free cash flow from capital (FCFE)

The formula for estimating free cash flow of capital is as follows:

NI ( Net Income) – net profit of the enterprise;

DA – depreciation of tangible and intangible assets;

∆WCR – net capital costs, also called Capex ( Capital Expenditure);

Investment – the amount of investments made;

Net borrowing is the difference between repaid and received loans.

The use of cash flows in various methods for assessing an investment project

Cash flows are used in investment analysis to evaluate various project performance indicators. Let's consider the main three groups of methods that are based on any type of cash flow (CF):

Statistical methods for evaluating investment projects
- Payback period of the investment project (PP,PaybackPeriod)
- Profitability of an investment project (ARR, Accounting Rate of Return)
- Current value ( N.V.NetValue)
Dynamic methods for evaluating investment projects
- Net present value (NPVNetPresentValue)
- Internal rate of return ( IRR, Internal Rate of Return)
- Profitability index (PI, Profitability index)
- Annual annuity equivalent (NUS, Net Uniform Series)
- Net rate of return ( NRR, Net Rate of Return)
- Net future value ( NFV,NetFutureValue)
- Discounted payback period (DPPDiscountedPayback Period)
Methods that take into account discounting and reinvestment
- Modified net rate of return ( MNPV, Modified Net Rate of Return)
- Modified rate of return ( MIRR, Modified Internal Rate of Return)
- Modified net present value ( MNPV,ModifiedPresentValue)

All these models for assessing project performance are based on cash flows, on the basis of which conclusions are drawn about the degree of project effectiveness. Typically, investors use the firm's free cash flows (assets) to evaluate these ratios. The inclusion of free cash flows from equity in the formulas for calculating allows us to focus on assessing the attractiveness of the project/enterprise for shareholders.

Summary

In this article, we examined the economic meaning of net cash flow (NCF), showed that this indicator allows us to judge the degree investment attractiveness project. We examined various approaches to calculating free cash flows, which allow us to focus on valuation for both investors and shareholders of the enterprise. Increase the accuracy of the assessment of investment projects, Ivan Zhdanov was with you.

This beautiful and attractive name encrypts an important business indicator that answers the key question: “Where is the money?” In this article, we will decipher the components of this indicator in more detail, derive a formula for its calculation and justify the method based on the assessment of net cash flows.

What is net cash flow (NCF)

This term comes from in English. In the original, its name sounds like Net Cash Flow, the abbreviation NCF is accepted. In the specialized literature, the designation Net Value is sometimes used - “current value”.

Cash flow They call cash flow in an organization: inflows and outflows of finance and their equivalents. Incoming funds form a positive cash flow (Cash Inflow, abbreviation CI), outgoing funds form a negative cash flow, or outflow (Cash Outflow, CO). When will he be considered “clean”?

DEFINITION. If you take a certain time period and trace the inflow and outflow of money during this period, adding up the positive and negative flows, then the resulting value will be Net cash flow, that is, the difference between the inflow and outflow of funds.

This is a key position of investment analysis, by which you can determine:

attractiveness of the organization for potential investors ( economic efficiency investment project);
current financial situation;
the organization's ability to increase its value.

Components of net cash flow

The company conducts different kinds activities that require an outflow of funds and provide an inflow. Each type of activity “carries” its own cash flow. To determine the NPV, the following are taken into account:

operating room – OSF flow;
financial – FCF;
investment – ICF.

IN operating cash flow includes:

funds paid by buyers of goods or services;
money paid to suppliers;
salary payments;
social contributions;
rent payments;
maintaining operational activities.

IN financial cash flow include:

obtaining and repaying loans and borrowings;
interest on loans and borrowings;
payment and receipt of dividends;
other payments for profit distribution.

Investment cash flow includes:

remuneration to suppliers and contractors for non-current assets;
payment for delivery and installation of non-current assets;
interest on loans for non-current assets;
issuance and repayment of various financial assets (bonds, etc.).

NOTE! Sometimes certain receipts or payments can be attributed to different cash flows. For example, if a loan was taken to secure an ongoing business, it should be classified as FCF, and if its intended purpose is a new business direction, it is already ICF. The specific situation should always be taken into account.

Net Cash Flow Formulas

The general formula for calculating NPV can be presented as follows:

NPV = CI – CO, Where:

CI – incoming flow;
CO – outgoing flow.

If we take into account the grouping of payments by reporting time periods, the formula will take the following form:

NPV = (CI 1 – CO 1) + (CI 2 – CO 2) + … + (CIN– CON).

In generalized form, the formula can be presented as follows:

NPV =i=1 n ( CI i – CO i), Where:

CI – incoming flow;
CO – outgoing flow;
n – cash flow assessment number.

You can imagine the NPV as a set of flows from different types activities of the organization: operational, financial and investment):

NPV = (CI – CO) OSF + (CI – CO)FCF + (CI – CO)ICF.

This division has an important meaning: the final result will not show which type of activity influenced the final flow, what specific processes had this influence and what the trends are.

Methods for calculating NPV

The calculation method is selected based on the purpose, as well as the completeness of the reporting data. Users choose between direct and indirect NPV calculation. In both cases, it is important to separate the flows by activity.

Direct method for calculating NPV

It relies on accounting for the movement of funds in the organization’s accounts, reflected in the accounting accounts, in the General Ledger, and order journals separately for each type of activity. The main indicator is the company's sales revenue.

The direct method allows you to quickly track the inflows and outflows of an organization’s funds, control the liquidity of assets and solvency.

FOR YOUR INFORMATION! This method is used for the cash flow reporting form developed by the Ministry of Finance of the Russian Federation and approved by Order No. 4N of January 13, 2000 No. 4N “On Forms of Accounting Reports of Organizations.”

To calculate the NPV using this method, you need to add up the positive flows (revenue, other income) and subtract from them costs, tax payments and other negative flows.

The direct method, unfortunately, does not allow linking the final financial result (net profit) with changes in monetary assets.

Indirect method of calculating NPV

This method, unlike the direct one, shows the relationship between cash flows and financial results.

Net profit is not exactly the same as increased cash flow. A more in-depth study shows that profit can be either less than the NPV or exceed it. For example, during the analyzed period we purchased new equipment, that is, we increased costs, which will lead to an increase in profit not in this period, but only in the following periods. We took out a loan - cash flow increased, but net profit did not increase. The main differences between NPV and net profit are shown in Table 1.

Table 1 Difference between net cash flow and net profit

№	NPV	Net profit
1.	Movement of money in real time	The amount of money at the end of the reporting period
2.	Shows the actual receipt of funds for a certain period of time (reporting period)	Shows income for this time period
3.	Accounts for all receipts of funds	Does not take into account a number of cash receipts (loans, grants, sponsorship, investments, etc.)
4.	Takes into account all payments of funds	Does not take into account a number of cash payments (repayment of loans, loans).
5.	Does not include row cash costs(depreciation, deferred expenses)	Takes all costs into account
6.	A high score indicates financial well-being	A high indicator does not necessarily indicate free cash flow

The indirect method converts net income into cash flow indicators by making adjustments, namely:

depreciation charges;
movements on liabilities;
changes in assets.

Indicators are taken from the balance sheet and its annexes, financial statements, and the General Ledger.

To calculate NPV using the indirect method, you should sum up the net profit indicators and the amount of depreciation of tangible and intangible assets, as well as the delta (decrease or increase) of accounts payable and reserve funds, then subtract the delta of accounts receivable and inventories. Thus, you can see how net cash flow is affected by the movement of figures on the balance sheet - changes in the value of assets and liabilities.

Estimation of the NPV indicator

NPV is greater than zero(positive cash flow) can arise either due to an increase in liabilities or a decrease in assets. In any case, the inflow of funds is greater than their outflow. This indicates the investment attractiveness of the company in this period. To evaluate an investment project, one should take into account a long period, including the payback period of investments, and apply. The higher the value, the more attractive the project will be to investors.

When comparing the net cash flows of two different organizations, the one with the higher value will be considered more attractive for investment.

NPV is close to zero– this indicator indicates that the organization does not have enough funds to increase its value. Investors reject such projects.

NPV is less than zero(negative cash flow) – the outflow of funds exceeds their inflow. The enterprise is financially unprofitable; naturally, investments in it are unacceptable.