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 type of performance assessment 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. In the case of conducting the presented research, the organization has the opportunity to maintain a balance of its financial resources in the current and planned period.

Cash flows must be synchronized in their arrival time and volume. Thanks to this you can achieve good performance development of the company, 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).

By type of activity there are distinguished production (operational), financial and investment group. 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 applied when investment analysis activities. It gives the researcher information about the financial condition of the company, its ability to increase its market value, attractiveness for 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 everyone 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 involves using the balance sheet items, as well as the income and expense statement of the enterprise, for analysis. For analysts, this method is more informative. It will allow you 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 net profit indicator can also be considered 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 = NPO + NPF + NPI, where NPV is the net cash flow in the period under study, NPO is the flow from operating activities, NPF is from financial transactions, PPI - in the context of investment activity.

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 intangible assets, PDF - income from the sale of long-term financial assets, RA - income for the sale of shares, DP - interest and dividends, POS - acquired fixed assets, ONP - balance of work in progress, PNA - purchase of intangible assets, PDF - 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 is additionally attracted long-term loans, DKKR is additionally attracted short-term loans, BCF is non-repayable targeted financing, VDKD is debt payments on long-term loans , 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:

ChPO = state of emergency + AOS + ANA - DZ - Z - KZ + RF, where state of emergency - net profit enterprises, AOS - depreciation of fixed assets, ANA - depreciation of intangible assets, DZ - change accounts receivable in the period under study, Z - change in reserves, 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 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.

The profit of an enterprise, which is reflected in the statements, should be an indicator of the effectiveness of its activities. In practice, it is only partially related to the finances that the company actually receives. The actual indicator characterizing the profitability of the organization can be identified in the cash flow statement.

Relevance of the issue

Net income does not fully reflect the amount of money actually received. Some items in the reporting are exclusively “paper”. For example, depreciation or revaluation of assets due to exchange rate differences. Such articles do not bring real income. Part of the profit is spent by the enterprise to maintain current work and develop production (construction of workshops, purchase of equipment). In some cases, these costs may be higher than net income. In this regard, an enterprise may be profitable on paper, but in reality suffer losses.

Movement of finance

In practice, there are three types of flows:

1. Operating. It shows the amount of funds received by the enterprise from its core activities.
2. Investment. This flow characterizes the movement of funds that are aimed at maintaining and developing current work.
3. Financial. It shows movements of money transactions.

Net cash flow, free cash flow

There is a significant difference between these articles. When summing up operating, investment and financial indicators the movement of funds is obtained clean flow. It is reflected in the reporting as a decrease/increase in the volume of assets and their equivalents. Net flow can be negative (indicated in parentheses) or positive. It allows you to see how much the company earns or loses. Business analysis can be carried out in two ways. The first involves assessing the value of the enterprise as a whole, including its debt and equity capital. The second method takes into account only the means internal sources financing. The first approach discounts the free cash flows generated by all reserves. The rate is based on the cost of raising capital. Finance generated by all (internal and external) sources forms the company's free cash flow (FCFF). In the second case, the value of not the entire enterprise is determined, but only its own capital. For this purpose, the free cash flow of FCFE is discounted. It shows the amount of finance that remains after paying taxes from profits, paying off liabilities, and incurring expenses for maintaining and improving operating activities.

Free Cash Flow: Calculation

FCFE is determined in several steps. It all starts with net profit. Its indicator is taken from the income and loss statement. Depreciation, wear and tear and depletion are added to this value. Indicators can be taken from the financial flow report. At its core, depreciation exists solely on paper, since deductions are not actually made. After this, the capital investment is deducted. They represent the costs of maintaining ongoing work, purchasing and upgrading equipment, constructing new facilities, and so on. Indicators are taken from the investment activity report.

Working capital

An enterprise can invest in short-term assets. In this regard, the change in value is calculated working capital. If it increases, free cash flows decrease. Working capital is defined as the difference between current assets and liabilities. In this case, non-monetary capital is used. That is, the size of current assets is adjusted to the indicator of finances and their equivalents.

General formula

In addition to paying off existing debts, the company attracts new sources of financing. This circumstance also affects free cash flows. In this regard, it is necessary to calculate the difference between deductions on old debts and the receipt of new loans. Indicators should be taken from the financial performance report. Thus, the estimate of free cash flow at equity carried out according to the formula:

FCFE = Chp + A – Kz +/- change Ok – repayment of debts + obtaining loans, in which:

• Chp - net profit;
• A – depreciation;
• Кз – capital costs;
• Ok – working capital.

Alternative option

It should be said that depreciation is far from the only “paper” expense of an enterprise that reduces profit. In this regard, another equation can be applied. The formula uses cash flow, which includes net income, adjustments for non-cash transactions (including depreciation), as well as a decrease/increase in working capital. The equation looks like this:

FCFE = Emergency from operating activities – Kz – repayment of debts + obtaining loans, in which:

FCFF

Free cash flows are assets that remain with a company after capital investments and taxes. In this case, FCFF is calculated before deductions for debt and interest. The equation will be:

FCFF = after-tax operating income + depreciation – cap. costs +/- changes in working capital.

There is a simpler formula:

FCFF = net operating flow - cap. expenses.

The quantities considered can have both positive and negative values. In the latter case, this occurs if the company suffers losses or costs exceed incoming profits. The considered free cash flows differ mainly in that the calculation of FCFF is carried out after, and FCFE - before the receipt/payment of debts.

Owner's profit

W. Buffett uses it as cash flow. The owner's profit is calculated as follows:

Emergency + A and other non-monetary transactions – Кз (average for the year), where:

• Chp – net profit;
• Kz – capital expenditures on fixed assets necessary to maintain long-term volumes and competition.

Moreover, if the company needs additional working capital, its increase is also included in capital investments. It is believed that estimating free cash flow based on the owner's profit is the most conservative method available.

Conclusion

At its core, free cash flows are assets that can be withdrawn from a business completely painlessly for it, without fear that the enterprise may lose its position in the market. These finances remain with the company after it has made all the necessary expenses. Analysis of free flows allows you to get a real idea of ​​how much an enterprise actually earns, how much money remains at its disposal for needs not related to its main activities. The indicator can be both positive and negative. In the latter case, the company will spend more than it receives. This happens, for example, in cases where a major investment program. Meanwhile, negative cash flow does not in all cases indicate a bad situation in the company. This is due to the fact that significant current costs in the present period can bring greater profits in the future.

The company's profit, which is shown in the income statement, should in theory be an indicator of the effectiveness of its work. However, in reality, net profit is only partially related to the money a company makes in real terms. How much money a business actually makes can be found out from the cash flow statement.

The fact is that net profit does not fully reflect the money received in real terms. Some of the items in the profit and loss statement are purely “paper”, for example, depreciation, revaluation of assets due to exchange rate differences, and do not bring real money. In addition, the company spends part of its profits on maintaining its current activities and for development (capital costs) - for example, the construction of new workshops and factories. Sometimes these costs can even exceed the net profit. Therefore, a company may be profitable on paper, but in reality suffer losses. Cash flow helps assess how much money a company actually makes. A company's cash flows are reported on the cash flow statement.

Company cash flows

There are three types of cash flows:

• from operating activities - shows how much money the company received from its core activities
• from investment activities - shows the movement of funds aimed at developing and maintaining current activities
• from financial activities - shows the flow of funds from financial transactions: raising and paying off debts, paying dividends, issuing or repurchasing shares

The summation of all three items gives net cash flow - Net Cash Flow. It is reported in the report as Net increase/decrease in cash and cash equivalents. Net cash flow can be either positive or negative (negative is indicated in parentheses). It can be used to judge whether the company is making money or losing it.

Now let's talk about what cash flows are used to value a company.

There are two main approaches to business valuation - from the point of view of the value of the entire company, taking into account both equity and debt capital, and taking into account the value of only equity capital.

In the first case, cash flows generated by all sources of capital—own and borrowed—are discounted, and the discount rate is taken as the cost of attracting total capital (WACC). The cash flow generated by all capital is called the firm's free cash flow FCFF.

In the second case, the value of not the entire company is calculated, but only its equity capital. This is done by discounting free cash flow by FCFE's equity - after debt payments have been made.

FCFE - free cash flow to equity

FCFE is the amount of money left over from earnings after taxes, debt payments, and expenses to maintain and develop the company's operations. The calculation of free cash flow to FCFE's equity begins with the company's net income (Net Income), the value is taken from the income statement.

Depreciation, depletion and amortization from the income statement or cash flow statement is added to it, since in fact this expense exists only on paper, and in reality the money is not paid.

Next, capital expenditures are deducted - these are expenses for maintaining current activities, modernization and acquisition of equipment, construction of new facilities, etc. CAPEX is taken from the investment activity report.

The company invests something in short-term assets - for this, the change in the amount of working capital (Net working capital) is calculated. If working capital increases, cash flow decreases. Working capital is defined as the difference between current (current) assets and short-term (current) liabilities. IN in this case it is necessary to use non-cash working capital, that is, adjust the value of current assets by the amount of cash and cash equivalents.

For a more conservative estimate, non-cash working capital is calculated as (Inventory + Accounts Receivable - Accounts Payable last year) - (Inventory + Accounts Receivable - Accounts Payable previous year), the figures are taken from the balance sheet.

In addition to paying off old debts, the company attracts new ones, this also affects the amount of cash flow, so it is necessary to calculate the difference between payments on old debts and obtaining new loans (net borrowings), the figures are taken from the statement of financial activities.

The general formula for calculating free cash flow to equity is:

FCFE = Net income + Depreciation - Capital expenditures +/- Change in working capital - Repayment of loans + Obtaining new loans

However, depreciation is not the only “paper” expense that reduces profit; there may be others. Therefore, a different formula can be used using cash flow from operations, which already includes net income, adjustment for non-cash transactions (including depreciation), and changes in working capital.

FCFE = Net Cash Flow from Operating Activities - Capital Expenditures - Loan Repayments + New Borrowings

FCFF is the firm's free cash flow.

A firm's free cash flow is the cash remaining after paying taxes and capital expenditures, but before subtracting interest and debt payments. To calculate FCFF, operating profit (EBIT) is taken and taxes and capital expenditures are subtracted from it, as is done when calculating FCFE.

FCFF = After Tax Operating Profit (NOPAT) + Depreciation - Capital Expenditure +/- Change in Working Capital

Or here's a simpler formula:

FCFF = Net Cash Flow from Operating Activities – Capital Expenditures

FCFF for Lukoil will be equal to 15568-14545=1023.

Cash flows can be negative if the company is unprofitable or capital expenditures exceed profits. The main difference between these values ​​is that FCFF is calculated before the payment/receipt of debts, and FCFE after.

Owner's earnings

Warren Buffett uses what he calls owner's earnings as cash flow. He wrote about this in his 1986 address to Berkshire Hathaway shareholders. Owner's profit is calculated as net profit plus depreciation and amortization and other non-cash transactions minus average annual amount capital expenditures on fixed assets that are required to maintain long-term competitive position and volumes. (If a business requires additional working capital to maintain its competitive position and volume, its increase should also be included in capital expenditures).

Owner's profit is considered to be the most conservative method of estimating cash flow.

Owner's Earnings = Net Income + Depreciation and Amortization + Other Non-Cash Transactions - Capital Expenditures (+/- Additional Working Capital)

In essence, free cash flow is the money that can be completely painlessly withdrawn from a business without fear that it will lose its position in the market.

If we compare all three parameters of Lukoil over the past 4 years, their dynamics will look like this. As can be seen from the graph, all three indicators are falling.

Cash flow is the money that remains with the company after all necessary expenses. Their analysis allows us to understand how much the company actually earns, and how much cash it actually has left for free disposal. DP can be both positive and negative if the company spends more than it earns (for example, it has a large investment program). However, a negative DP does not necessarily indicate a bad situation. Current large capital expenditures may return many times greater profits in the future. A positive DP indicates the profitability of the business and its investment attractiveness.

The cash flow of an enterprise consists of cash flows as a result of performing various business transactions, constituting current (operating), investment and financial activities.

Current activities are related to the production and sale of products and provide the main cash flow.

Investing activities include the receipts and uses of cash associated with the purchase and sale of long-term assets, capital investments and investment income.

When favorable for the enterprise economic situation it strives to expand and update production, which generally leads to a temporary outflow of funds for this type of activity.

Financial activities are short-term financing operations, loans and borrowings, sale and repurchase of shares, bond issues and their repayment, foreign exchange obligations, payment of bills, etc. Cash flows generated by current activities can be partially used for investment (for example, for the purchase of fixed assets) or financial (payment of dividends, repayment of loans and borrowings). It also happens the other way around, when current activities are supported by financial and investment funds. This ensures the survival of many enterprises in unstable economic conditions.

To increase the analyticality of information on cash flows, it is classified by type of activity of the organization (Table 1.3.1).

Table 1.3.1

Distribution of cash flows by type of activity of the organization

Receipts (+DP)	Payments (- DP)
Operating activities
1. Revenue from sales. 2. Collection of accounts receivable. 3. Proceeds from sales material assets. 4. Advances from buyers.	1. Payments to suppliers. 2. Payment of wages to staff. 3. Payments to the budget and off-budget funds. 4. Payment of interest on the loan 5. Payments for the consumption fund. Repayment of accounts payable.
Investment activities
1. Sale of fixed assets, intangible assets, construction in progress. 2. Receipt of funds from long-term financial investments(sales, dividends).	1. Capital investments for production development. 2. Long-term financial investments.
Financial activities
1. Short-term loans and borrowings. 2. Long-term loans and loans. 3. Proceeds from the sale and payment of bills. 4. Issue of shares. 5. Targeted financing.	1. Repayment of short-term loans and borrowings. 2. Repayment of long-term loans and borrowings. 3. Payment of dividends. 4. Sale and payment of bills.

The difference between the payment and receipt streams is the net cash flow.

Net cash flow is the difference between positive and negative cash flows. The presence of a positive net cash flow indicates the solvency of the enterprise.

In practice, two methods are used to calculate net cash flow (NCF): direct and indirect. In both cases, net cash flow is calculated by activity. Differences in calculations relate only to operating activities.

The direct method is based on the movement of funds through the accounts of the enterprise. The calculation is carried out by type of activity of the enterprise, using data from the General Ledger, order journals, analytical accounting. Calculating cash flows using the direct method makes it possible to quickly control the receipt and expenditure of funds of an enterprise and assess its solvency and liquidity.

In the system of intra-company financial planning, the development of a budget of income and expenses, as well as consolidated budget carried out using the direct method. In Russia, this method is the basis for the cash flow statement form, approved by order of the Ministry of Finance Russian Federation dated January 13, 200 No. 4N “On forms financial statements organizations." The initial element of calculation when direct method is sales revenue. (Table 1.3.2.)

Formula for calculating NPV using the direct method for operating activities:

where is sales revenue;

Other supply;

Operating expenses;

HP - tax payments;

Other cash payments.

The disadvantage of this method of calculating cash flows is that it does not reveal the relationships financial result(received profit) with changes in the absolute amount of funds.

T table 1.3.2

Example of calculating net cash flow from operating activities (direct method)

The indirect method is preferable from an analytical point of view, as it answers the question: how are net cash flow and net profit related to each other?

At first glance, it seems that net profit should be expressed in the increase in the company’s funds. However, a deeper analysis shows that cash flow can be either more or less than net profit. For example, if during the reporting period equipment was purchased at the expense of own funds, then this will lead to a decrease in cash flow compared to net profit. If in reporting month a loan is received or shares are issued, this will lead to an increase in cash flow compared to net profit.

Thus, the differences between the amount of profit received and cash flows are as follows:

1) profit reflects the net income received by the enterprise for a certain period of time (year, quarter), which does not coincide with the actual receipt of funds during this period:

2) cash flow includes receipts (loans, grants, investments) and payments (repayment of loans, loans), which are not taken into account when calculating profit;

3) some types of accrued costs (depreciation, deferred expenses) increase costs, but do not cause outflows and inflows of cash;

4) the presence of profit does not mean that the enterprise has free cash.

For example, with an increase in production volumes, an organization may at some point experience a lack of funds to pay bills, that is, be insolvent, although profitable.

So, profit- this is a certain amount of money calculated at the end of the reporting period, cash flow- This is the movement of funds in real time.

The indirect method converts net income into net cash flow from operating activities by making appropriate adjustments. The adjusting factors are depreciation and any changes in current assets and liabilities. The initial information in this case is the data of the balance sheet, profit and loss statement, appendices to the balance sheet, and the general ledger. (Table 1.3.3)

Formula for calculating NPV using the indirect method for operating activities:

where is net profit;

, - ∑ depreciation of fixed assets and intangible assets, respectively;

Increase (decrease) in accounts receivable;

Increase (decrease) in the amount of inventory inventories;

Increase (decrease) in accounts payable;

f - increase (decrease) in reserve and other insurance funds.

As can be seen from formula (1.3.2), net cash flow depends on changes in the value of assets and liabilities of the balance sheet.

Table 1.3.3

An example of calculating net cash flow from operating activities using the indirect method

Positive cash flow is formed either by reducing an asset or by increasing a liability. The sale of inventory, equipment, reduction of accounts receivable - all this ensures the flow of cash.

Getting loans, selling ordinary shares and so on. entail an increase in liabilities and an additional influx of financial resources.

Negative cash flow is associated with either an increase in assets or a decrease in liabilities. For example, the growth of inventories, accounts receivable, and the construction of a business facility increase assets, absorbing cash. Likewise, payment bank loan, a decrease in accounts payable, a loss instead of a profit - all this reduces liabilities, causing an outflow of funds.

Net Cash Flow (NCF)— this is the difference between positive cash flow (receipt of funds) and negative cash flow (expense of funds) in the period under consideration in the context of its individual intervals.

Net Cash Flow Formula (NCF)

N CF = CF + — CF —, Where

CF+- positive cash flow,

CF -- negative cash flow.

Typically, payments within a cash flow are grouped by time periods corresponding to reporting periods or steps investment project. For example, by month, quarter, year. In this case, the formula for net cash flow can be written as follows:

NCF = NCF 1 + NCF 2 +…+ NCF N

NCF = (CF 1+ - CF 1-)+ (CF 2+ - CF 2-)+...+ (CF N+ - CF N-)

Look Excel spreadsheet

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Cash flow discounting

If cash flow payments are made over long periods of time s e intervals of the order of several months or years, it is necessary to take into account the change in the value of money over time. And, namely, the amount of money that we have at the moment has b O greater real value than the same amount we will receive in the future. The operation of reducing the cost of future payments to the current value is called discounting cash flows.

For example, when assessing economic efficiency planned investments, the net cash flow associated with the investment project is discounted, usually this value is called net present value (NPV, Net Present Value).

Look at the Excel spreadsheet
"Calculation of investment projects"
WACC, NPV, IRR, PI, ROI, Payback period
Sustainability analysis, Project comparison

Many people believe that the measure of a company's performance is its profitability. However, many of the items of expense and income that are recorded on the balance sheet are not tied to real money.

We are talking about depreciation charges and exchange rate revaluations of assets. Also, part of the profit goes to capital costs and ongoing activities. Free cash flow gives you a real understanding of the amount of money you earn.

Place of free cash flow among other financial indicators

During the operation of an enterprise, several types of cash flows arise. The total (gross) amount of money is recorded in the NCF (net cash flow) indicator, which is formed based on the summation of all positive and negative financial transactions from the investment, financial and operating activities of the company. However, another indicator is much more expressive.

Free cash flow (FCF - free cash flow) is the amount of money that remains at the disposal of owners and investors after deducting all taxes, as well as capital investments. In effect, it is cash that increases a company's shareholder value and expands its asset base. If the FCF has a good positive indicator, then the enterprise can develop and produce new products, pay increased dividends, acquire assets, and therefore become more attractive to its shareholders.

How is free cash flow calculated?

In the activities of any enterprise, there are two main types of free cash flows:

• Free enterprise flow (FCFF) is cash after subtracting capital costs and taxes, but before calculating credit interest. It is used to understand the real value of the enterprise itself and is important for lenders and investors.
• Free flow on equity (FCFE) is the cash remaining after borrowing interest, taxes, and operating expenses have been subtracted. The indicator is important for owners and shareholders, as it assesses the shareholder value of the company.

• net investments in working capital;
• net investments in fixed capital;
• money from the operating activities of a business after taxes.

The first two items are taken from the balance sheet.

To search for an indicator free flow of enterprise The most commonly used formula is:

wherein:

• Tax – amount of income tax;
• DA – indicator of depreciation of assets (intangible and tangible);
• EBIT – profit before all taxes;
• ∆WCR – the amount of capital expenditures, the term CAPEX can also be used;
• CNWC – dynamics of working net capital (expenses for the purchase of new assets). It is calculated according to this principle: (Zi + ZDi – ZKi) – (Zo + ZDo – ZKo), where Z – inventories, ZD – accounts receivable, ZK – accounts payable. From the sum of these indicators for the current period (index i) the sum of similar values ​​for the previous time period is subtracted (indexo).

There are other payment options. For example, in 2001 the following methodology was proposed:

wherein:

• CFO refers to the amount of money from a company's operating activities;
• Tax – income tax (interest rate);
• Interest expensive – interest costs;
• CFI – funds from investment activities.

Some make the most of it simple formula to calculate the value of the required indicator:

FCFF = NCF – CAPEX , Where

• NCF – net cash flow;
• CAPEX – capital expenditures.

The FCFF flow is created by the company's assets (operating and production) and is directed to investors, so its value is total amount payments, this rule also applies in reverse. This rule is called the cash flow identity and is written graphically as follows: FCFF =FCFE (finance to owners) +FCFD (finance to creditors)

Index free flow on your capital(FCFE) indicates the amount remaining at the disposal of shareholders and owners after settlement of all tax obligations and mandatory investments in the operating activities of the enterprise. The most important criteria here are:

• NI (Net Income) – the company’s net profit, its value is taken from the accounting report;
• DA (Depletion, Depreciation & Amortization) - depreciation, depletion and wear, an accounting indicator;
• ∆WCR (CAPEX) – costs of current activities (capital expenditures), they can be found in the report on investment activities.

Ultimately general formula looks like this:

In addition to the abbreviations explained above, some more are used here:

• Investment – ​​the volume of investments made by the company in short-term assets, source – balance sheet;
• Net borrowing is the delta between already repaid and newly received loans, source – financial statements.

However, some “expenditure” items (for example, depreciation) do not lead to actual expenditure of funds, so a slightly different system for calculating this indicator is often used.

Here we use the amount of cash flow from production operations, which already takes into account changes in working capital, net profit, the indicator is also adjusted for depreciation and other non-cash transactions:

FCFE = CFFO - ∆WCR + Net borrowing

In fact, the main difference between the types of free cash flows discussed is that FCFE is calculated after debts are received (paid), and FCFF is calculated before that.

Billionaire Warren Buffett uses the most conservative valuation method this indicator, which he calls Owner`s earnings (owner's profit). In his calculations, in addition to the usual indicators, he also takes into account the average annual amount of funds that should be invested in fixed assets to maintain a market competitive position and production volumes in the long term.

How is FCF used in practice?

Ideally, a stable operating enterprise in a normal economic situation should have a positive FCF indicator at the end of the year or other reporting period. This state of affairs allows the company to repay all its obligations in a timely manner, as well as expand (produce new products, modernize equipment, diversify markets, open new facilities).

In other words, the owner can withdraw the FCF amount from circulation without the risk of reducing the company’s capitalization and losing its market position.

If FCF is above zero, it means the following:

• timely payment of dividends to shareholders;
• increase in cost valuable papers companies;
• the possibility of carrying out an additional issue of shares;
• the owners and management of the enterprise are effective managers.

If free cash flow is negative, this may indicate two possible options company status:

• the enterprise is unprofitable;
• the management of the enterprise invests large amounts of money in its development, which can provide returns in the long term due to high level profitability.

To understand the real state of the company, it is necessary, in addition to the current situation, to also study its development strategy. To increase the value of a company, you need to use growth levers, which include:

• tax optimization;
• review of the direction of capital investments;
• increasing revenue and reducing costs to increase EBIT;
• bringing assets to an acceptable minimum by increasing their efficiency.

Investors often use the free cash flow indicator to calculate a number of statistical and dynamic coefficients that evaluate the operating efficiency and profitability of an enterprise, including IRR (internal rate of return), DPP (discounted payback period), ARR (investment project profitability), NV (current value ).

Due to the fact that they remain at the disposal of the enterprise for

Simple reproduction of fixed production assets.

Rule. If NPV > 0 - project related to implementation

New equipment and technology are

It looks profitable.

If NPV< 0 -проект является невыгодным.

If NPV = 0 - the project is not profitable -

Not unprofitable, not unprofitable. The decision about it

The investor accepts the sales.

The larger the NPV value, the larger stock financial

The project has greater strength, and therefore less risk associated with it.

New with implementation new technology and technology.

The criteria for NPV and ID are closely interrelated, since

They are determined on the basis of the same calculation base.

The profitability index is determined from the expression

Rule. If ND > 1, the project is effective.

If ND< 1 -проект неэффективен.

If ND = 1, the decision to implement the project is

The investor takes it.

Internal rate of return (IRR). Under the internal norm

Yields understand the value of the discount rate (E),

At which the NPV of the project is equal to zero, i.e.

IRR (IRR) = E, at which NPV =

This criterion (indicator) shows the maximum permissible

Timy relative level expenses that may be associated

Cited with the project for introducing new technology.

For example, if the project is financed entirely by a loan

Commercial bank, then the value of IRR shows the upper graph

Nitsu permissible level of banking interest rate, exceed-

Failure to do so makes the project unprofitable.

In practice, projects related to the introduction of new technology

Funded not from one source, but from several, therefore

IRR must be compared with the cost of capital (CC).

If IRR > CC, then the project should be accepted;

IRR< СС, то проект следует отвергнуть;

IRR = SS, then the project is neither profitable nor unprofitable.

Payback period.

The payback period of the project is called

There is a time during which receipts from production activities

The enterprise's assets will cover the investment costs. Payback period

Bridges are usually measured in years or months.

It should be noted that the payback period is one of the most

Our simple and widespread methods of economic

Justification of investments in world practice.

In conditions of high inflation, instability in society and

State, i.e. in conditions of increased investment risk,

The role and significance of the payback period as an economic criterion

The justification for investment is increasing significantly.

But in any situation, the shorter the payback period, the more

This or that investment project is more attractive.

The general formula for calculating the payback period is:

To determine the payback period can be used

And other, simpler methodological approaches that are partially

Discussed in the next paragraph.

Simplified methods

Economic justification for investment

Into new equipment and technology

Economic justification for investment in new technology and

Technology at existing enterprises, if strictly followed

A labor-intensive and lengthy process.

Therefore, in practice quite often there is a need to use

The use of simplified methods allowing, on the one hand,

us, to simplify the payment system, and on the other hand, to quickly receive

Objective results necessary for the adoption of management

Great decisions.

That is, we are talking about not scrupulously counting the movement

No cash flows for billing period(this is the most labor intensive

process) associated with the implementation of any investment

project, but use the final results of calculating monetary

Th flow at a certain calculation step.

The end result of calculating cash flow for each

The house step of the calculation period is net profit (Pch() plus

Depreciation charges (A;).

The value (Pf; + A() is the basis for determining the net

Discounted income, profitability index and payback period

Sti, i.e. indicators necessary for economic justification

Niya of capital investments allocated for the introduction of new technology

Nicknames and technologies at the enterprise.

In this case, the calculation of economic justification indicators

Capital investments can be made quite accurately according to

The following formulas.

Where Pch is the annual net profit received at the enterprise due to the introduction

consideration of new equipment and technology at the t-th step of calculation;

A(-annual depreciation deductions, calculated from the introduction of new

howl of equipment and technology at the enterprise at the t-th step of calculation;

E-discount rate;

K - capital investments necessary for the introduction of new technology and

Technologies.

To apply the proposed simplified methods of saving

Czech justification of capital investments allocated for implementation

When considering new equipment and technology, it is necessary to calculate the annual

The amount of net profit and the amount of depreciation

Deductions

Determination of the annual net profit from implementation

New equipment and technology does not cause any particular difficulties if

Read also:

What is Free Cash Flow | Free Cash Flow

Free Cash Flow — English Free Cash Flow a financial performance indicator calculated as the difference between operating cash flow and capital expenditures. Free cash flow (FCF) represents the cash a company has left over after incurring expenses necessary to maintain and/or expand its asset base. Free cash flow is important because it allows a company to pursue opportunities that increase shareholder value. Without sufficient cash, it is difficult to develop new products, acquire new assets, pay dividends and reduce debt.

Free cash flow is calculated using the following formula:

Where Tax Rate– income tax rate;

EBIT– earnings before interest and tax;

D.A.– depreciation of tangible and intangible assets (Depreciation & Amortization);

CNWC– change in net working capital (Change in Net Working Capital);

CAPEX– capital expenses (Capital Expenditure).

It can also be calculated by subtracting capital expenditures from operating cash flow.

Some investors believe that a company's stock price is primarily driven by earnings, often ignoring the actual cash it produces. However, earnings figures can be distorted by accounting tricks, with free cash flow being more difficult to falsify. So some investors rightfully believe that free cash flow gives a clearer picture of a company's ability to produce cash (and thus profit).

It's important to note that negative free cash flow in and of itself is not a bad indicator. If its value is negative, it could, for example, mean that the company is making a large investment. If these investments generate high returns, this strategy has the potential to pay off over the long term.

A qualitative analysis of an investment project is impossible without understanding the essence and structure of the cash flows that flow through the enterprise. It's important to understand Current state finances of the enterprise and its prospects further development to make the necessary adjustments in a timely manner. One of the main indicators of a company's health is net cash flow.

What is meant by net cash flow and how it is formed

Net cash flow is the difference between inflows and outflows (positive and negative) over a specified period of time.

In English the term sounds like NCF (Net Cash Flow). This indicator characterizes the financial well-being of the company, as well as the prospects for increasing its value and attractiveness for investment.

An investor can evaluate the potential effectiveness of financial investments in a given project using the NCF indicator:

• if NCF is above zero, then the project can be considered attractive;
• if the NCF is less than or equal to zero, then the business does not have enough cash to increase in value, hence it is a risky investment.

The higher the net cash flow, the more attractive the company.

In modern enterprises, financial flows are formed by three main types of activities:

• Operating room (production, main). These are funds received and used, on which the main activity directly depends (trade, production, services). Incoming funds are revenue from the sale of services, work, goods or inventory, advances from customers, money to pay off accounts receivable. Expendable – payment to contractors and suppliers for services and goods (raw materials, tools, materials), contributions to the budget and wage employees.
• Investment. This is the movement of funds associated with previously made investments, as well as with the sale or purchase of long-term assets. The main inflow here comes from the sale of intangible assets and fixed assets, and the expense comes from their acquisition (buildings, transport, machines, copyrights, licenses) and capital investments
• Financial. Consists of increasing the amount of money to support operating as well as investment activities. Inflow - from long-term or short-term loans and credits, issue of securities, targeted financing. Expenses – from repayment of loans, payment of interest and dividends.

The total indicator of cash flows from the investment, production and financial activities of a company constitutes its total cash flow.

How is net cash flow calculated using the direct method?

By international standards accounting and established practice when reporting on the flow of funds, direct and indirect methods are used. The difference between them lies in the completeness of the initial information about the company’s income and expenses. NPV is calculated by type of activity.

The calculation of net cash flow from operating activities using the direct method is based on the movement of cash through the company's accounts. In this case, data from balance sheet accounts, analytical accounting, order journals and the General Ledger is taken. This method helps to quickly monitor the ratio of a company’s expenses and income, assess its solvency and liquidity. When preparing financial statements, sales revenue is taken as the basis for calculation.

The direct method provides the following options:

• analyze the sources of money inflow and directions of their outflow;
• determine the structure of financial flows by type of activity;
• establish the relationship between revenue and sales for a specific period.

The formula for calculating net cash flow from operating activities using the direct method looks like this: ChDPo = BP + Av + ​​PrP – Z – OT – NP – PrV, Where:

• VR is revenue from sold services, works or goods;
• Av – advances from customers and buyers;
• PrP – other receipts;
• C – costs incurred in the process of core activities;
• OT – staff salaries;
• NP – taxes transferred to the budget;
• PrV – other payments.

With all the advantages of this model, it has a serious drawback: it does not show the relationship between the profit received and fluctuations in the total amount of funds. This is due to the fact that when calculating profits, parameters such as depreciation, fines, taxes, capital expenditures, advances and loans, and debt payments are not taken into account.

You can give a simple example of calculating net cash flow for current activities, based on the following indicative indicators:

• the amount of revenue for goods sold, services provided and work performed – 75,000 den. units;
• advance received from the customer – 500;
• loan taken from the bank – 12,000;
• dividends received – 400;
• expenses for services, works and goods supplied by suppliers and contractors - 50,000;
• wages of employees – 10,000;
• taxes transferred to the treasury - 7000;
• other payments (loan interest) – 400.

NDP = BP(75000) + Av (500) + PrP(12000+400) – Z(50000) – OT(10000) – NP(7000) – PrV(400);

NPV = 87900 (total receipts) – 67400 (total payments);

NPV = 20500.

Calculation using the indirect method, net profit and cash flow

Calculating net cash flow using the indirect method provides much more analytical information for the management of an enterprise or potential investor, since it demonstrates the relationship between net profit and net cash flow. In this case, cash flow can either exceed net profit or be less than it. For example, if for reporting period the company purchased expensive machines with its own money, then such a purchase will reduce cash flow compared to profit. In the case of an additional issue of shares or a loan, the opposite situation will be observed.

The difference between net income and cash flow amounts is as follows:

• profit characterizes the company’s income for a certain period of time (month, quarter, year), but this indicator may not coincide with actual receipt money for a given period;
• financial movements include payments (loan repayments) and receipts (donations, investments, loans), which are not taken into account when calculating profits;
• individual cost accruals (expenses of future time periods, depreciation) are recorded as costs, but do not lead to a real outflow of money;
• the presence of profit does not guarantee the availability of free money from the enterprise, for example, when production volumes increase.

Thus, we come to the conclusion that profit is a certain amount of money calculated as of the end date of a specific period, and cash flow indicates a constant (real-time) movement of funds. The indirect method is carried out by type economic activity firms and makes it possible to transform retained earnings using adjustments to net cash flow from production activities. Its main advantages:

• demonstrating the interdependence between certain types company activities;
• the relationship between changes in assets and profit;
• formation of financial flow for investment and operating activities and analysis of the dynamics of all factors influencing it.

ChDPo = PE + AOS + ANA + ΔZD + ΔZTMC + ΔZK + ΔVF + ΔVA + ΔPA + ΔBPD + ΔBPR +ΔRF, Where:

• PE – net profit (undivided);
• AOC – the amount of depreciation of fixed assets;
• ANA – the amount of depreciation of intangible assets;
• ΔЗД – decrease (increase) in accounts receivable;
• ΔZTMC – decrease (increase) in the level of inventories of material assets;
• ΔЗК – reduction (increase) of accounts payable;
• ΔVF – decrease (increase) in financial investments;
• ΔВА – advances issued;
• ΔPA – advances received;
• ΔBPD – future income;
• ΔBPR – future expenses;
• ΔRF – decrease (increase) in reserves for future payments.

As an example, we can give the following approximate calculation using the indirect method.

Initial data:

• net profit – 6000 den. units;
• depreciation of fixed assets – (+) 900;
• intangible assets (depreciation) – 0;
• accounts receivable – (-) 200;
• material reserves – (-) 300;
• accounts payable – (+) 700;
• financial investments – (-) 300;
• advances issued – (-) 100;
• advances received – (+) 400;
• future income – (+) 700;
• future expenses – (-) 500;
• reserve fund – (-) 200.

Accordingly, if you substitute the available data into the formula, you will get the following result:

NDP = PE (6000) + AOS (900) + ANA (0) + ΔZD (-200) + ΔZTMC (-300) + ΔZK (700) + ΔVF (-300) + ΔVA (-100) + ΔPA (400) + ΔBPD (700) + ΔBPR (-500) + ΔRF (-200);

NPV = 7100.

Considering that most of the initial data characterize the level of increase or decrease of a particular indicator, you need to be careful not to confuse the use of signs (+) and (-), which can lead to a distortion of the final result and incorrect conclusions regarding the financial well-being of the company. To make the calculation easier, it is convenient to make a table where all the indicators are more clear.

The indirect method involves a number of sequential adjustments:

• The first stage is to ensure consistency between your working capital and financial results. At the same time, depreciation and disposal of long-term assets are removed from the financial result.

  Typically, depreciation is charged to the cost of production. As a result, profit is reduced, but the actual amount of money is not, therefore, to correctly determine the available financial resources, the amount of accrued depreciation is added to the amount of profit. Fixed assets show a loss in the amount of their residual value, but this no longer affects the availability of money, since the real expense was earlier, at the time of acquisition of the asset. Therefore, the disposal amount is also added to the total.

• The second stage is adjustment for individual working capital items. In this case, for all active accounts, the size of the loan turnover is determined using the formula: OK = OD + Сн – Sk, where OK is the loan turnover, OD is the debit turnover, Сн is the balance at the beginning of the period under review, Sk is the balance on end of the period. If the balance at the end of, say, a quarter is higher than at the beginning, then profit is reduced by the amount of the difference in their indicators. The same thing happens in passive accounts, only there, in a similar case, the profit rate increases. The use of such calculations for all accounts of all types of activities, despite their labor intensity, gives the manager a clear picture of the company’s solvency and the possibility of attracting additional investments.

Net cash flow is determined not only when preparing business plans, but also for drawing up reports on balance sheet at the end of each reporting period (quarter, year). Which methods of calculating this indicator to choose depends on the head of the enterprise or potential investor, but in practice the indirect method is more often used.