Cash Flow Analysis Methods - Corporate Finance

Methods for analyzing cash flows

The priority objective of the cash flow analysis is to identify the deficit (surplus) of cash, the sources of their receipt and the direction of spending to monitor the current solvency of the corporation.

The financial stability of the corporation is directly dependent on the real money turnover in the form of a flow of cash receipts and payments reflected in the accounts of accounting. Therefore, the analysis of cash flow significantly complements the methodology for assessing solvency and liquidity and provides an opportunity to really assess the financial condition of the corporation. For these purposes, the direct and indirect methods referred to in paragraph 7.4 can be used.

The main document for the analysis of cash flows is a cash flow statement based on a direct method. With the help of this document you can set:

• level of financing of current and investment activity at own expense;

• corporation's dependence on external sources of income;

• dividend policy in the current period (and make a forecast for the future);

• the financial elasticity of the corporation, i.e. its ability to form cash reserves (in the form of a net inflow of cash);

• the real state of solvency in the reporting period and the forecast for the near future (quarter, year).

In the process of studying cash flows, you need to answer the following questions:

1) in the case of cash inflows:

- whether the inflow has occurred due to short-term obligations, the repayment of which will require an outflow in the future;

- was there any sale of property (capital and current assets)

- Is there any growth in share capital due to an additional issue of shares

- Are inventories reduced?

- Are the leftovers of finished products in the warehouse decreasing?

- how much is recovered receivable;

2) with outflow of funds:

- Is there a decrease in the turnover of current assets

- do not the absolute values ​​of reserves and receivables grow;

- was there a sharp increase in the volume of production and sales of goods, which requires the attraction of additional funds

- whether there were excessive payments to shareholders above the recommended rate of distribution of net profit (30-35%);

- are taxes and dues paid in a timely manner to the state budget fund

- whether there was a long payroll staff payroll.

The total cash flow should tend to zero, as a positive balance for one type of activity compensates for the surplus in its other form.

A system of standard analytical indicators is used to study cash flows. The most important of these are:

1) the balance of the aggregate cash flow (positive or negative), which is calculated by the formula

This balance characterizes the final result of the corporation's activity, which influences the formation and dynamics of the balance of its monetary assets;

2) cash flow liquidity ratio (CRLP):

To ensure the required liquidity of the cash flow, this coefficient must have a value of at least one. Exceeding this minimum amount will generate an increase in the cash balance at the end of the settlement period, i.е. contribute to the increase of the value of the general solvency of the corporation (Current assets/Short-term liabilities);

3) coefficient of cash flow efficiency (CEDP):


Based on the indices of Table. 7.2 The values ​​of the CRLP and CEDP are as follows:

- cash flow liquidity ratio:

• In the base year - 1,035 (205,973/199,061);

• in the reporting year - 1.04 (238 680/229 474);

- coefficient of efficiency of cash flow:

• In the base year, 0.035 (6912/199,061);

• in the reporting year - 0.04 (9206/229 474).

In the period under review, these coefficients have a positive value, and their magnitude has not changed significantly.

The systematization of the corporation's activities into three types (current, investment and financial) is extremely important for United States business practices, since a favorable (close to zero) aggregate net cash flow can be achieved through a covered negative cash flow from current activity by a cash inflow from the sale of assets (property) or the attraction of short-term bank loans. In this case, the amount of cash flow hides the real unprofitableness of the corporation's activities.

For corporations that have significant non-current assets, attracting loans from banks and using cash to increase net working capital, it is more convenient to apply the indicator of net cash inflows (flows), which is determined by the standard formula:

Based on the results of the analysis of cash flows by an indirect method, you can get answers to the following questions:

• what is the volume and sources of funds and the main directions of their spending;

• Is the corporation able to ensure, as a result of current activities, that payments exceed cash payments (reserve of cash)

• is it able to repay short-term obligations from receipts from corporate debtors

• Is the corporation's net profit sufficient to meet current investment needs?

• what is the difference between the amount of net profit received and the amount of cash.

Observance of these provisions in practice allows the financial manager not only to correctly analyze the movement of cash flows for the reporting period, but also to make well-founded forecasts for the future (quarter, year).

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