8.2. Cash flow analysis objectives
Why do some corporations accumulate large cash reserves (DS) in their companies' accounts, others prefer to optimize cash balances?
The main condition for the financial well-being of an enterprise is the inflow of cash that provides coverage for its obligations. The absence of such a minimally necessary stock of cash indicates its serious financial difficulties. Excessive amount of money means that the enterprise actually suffers losses connected with inflation and depreciation of money resources, or with the missed opportunity of their favorable placement and reception of the additional income. In this regard, it is advisable to assess the rationality of cash management in the enterprise.
So, money is a limited resource. Therefore, it is required to provide some mechanism for regulating the balance of their income and expenditure. At the same time, the priority task is to build a flexible cash management system capable of responding quickly to changes in the situation. Such flexibility, adaptability allows to form a reserve of money, ensuring the implementation of strategic decisions.
But any managerial decisions precedes the analysis of the situation; the analyst should know where the funds come primarily from the company and what they spend; how to determine their sufficient level for a particular business; whether the cash inflows are stable; what are the reasons for the insolvency of the company.
The results of the cash flow analysis are used to assess:
o the organization's ability to provide a clean money inflow;
o ability to repay obligations to creditors, pay dividends, make other payments;
o the need for additional attraction of funds
o the effectiveness of investment and financial operations.
To this end, a comprehensive analysis of cash flows based on financial statements is carried out. Evaluation of the results of the analysis over a sufficiently long period of time allows an answer to the following questions:
o in order to achieve what goals it is appropriate to invest;
o In what directions should the investments be reduced;
o from which sources to attract additional funds and to what extent the liabilities will be reduced in this regard;
o Is the company able to replenish reserves for contingencies.
In the process of cash flow analysis, it is necessary to strictly control the comparability of the actual and projected values of the analyzed indicators, promptly identifying the deviations arising from the set growth rates. This form of analytical work provides a qualitative management of the company's cash flows.
Of course, an effective cash flow management scheme ensures the company's financial stability, reduces the need for borrowed capital (and therefore financial risks), facilitates the acceleration of capital turnover and the strengthening of the company's solvency.
8.3. Information base for the analysis of cash flows
The methods used by financial analysts to analyze cash flows are based primarily on the annual financial statements. The main sources of information are a statement of cash flows, a balance sheet, a profit and loss account.
The advantages of the financial statements include its unification, availability to internal and external users. Such information can be applied in the conduct of a comparative analysis, since all enterprises form the reporting, being guided by generally accepted principles, the approved standards of financial reporting.
However, the balance sheet provides information about the company's cash balances at the end of the reporting period. In fact, the balance sheet data are static, characterize only the result of cash flow for the reporting period.
The cash flow statement covers one reporting period and illustrates the inflow and outflow of cash as a result of the company's current (operating), investment and financial activities. From this report, you can obtain information additional to that which is presented in the balance sheet and profit and loss account.
It is known that the size of the cash balance may deviate from the value of profit (loss) received by the company for the past reporting period. Based on the data of the balance sheet, it is impossible to determine the reasons for such a deviation, since it does not depend on changes in assets and liabilities. Such a deviation is determined by the fact that the financial result is formed on the basis of the accrual method, and the balance of cash means is a cash method (that is, after actual execution). In addition, not all amounts recognized by the accountant are recorded simultaneously (or in full) in the calculation of the financial result and the balance of cash. For example, the amount of accumulated depreciation fully determines profit (loss), and on the cash flow affects through the effect on the amount of income tax.
Therefore, in order to reliably estimate the reasons for the deviation of the balance of cash from the financial result, you should use the data of the income statement (and not just the balance sheet).
The indicators of the profit and loss account are of great importance for the analysis of cash flows. In this form of reporting, the analyst will find information on revenue from sales; cost of goods sold (work, services); Other types of costs recognized by the accountant as expenses of this reporting period; of all types of profit (from gross to net).
It should be emphasized that cash flow analysis can become a basis for obtaining serious estimates and conclusions only if financial reports are supplemented by information received by managerial accountants, as well as by specialists analyzing the dynamics of key technical and economic indicators. Such information can be obtained promptly, it is not tied to specific deadlines for the formation of the accounting report, is grouped by any indication and can be expressed both in value form and in physical terms (meters, pieces, kilograms).
However, the key format used for the analysis of cash flows should be a cash flow statement. The information presented in this report allows to find out whether the company's cash receipts exceeded its expenses in the past. It can also be used to forecast future cash flows. It even allows you to judge the probability of repayment of debt obligations and payment of dividends by the enterprise, as well as the emergence of the need for financing from external sources (Figure 8.1).
Fig. 8.1. The scheme for generating a statement of cash flows by type of activity
The structure of the cash flow statement of the contingent company is presented below. There are three sections in the report form:
1. Cash flow from operating activities (cash received and used in the course of the company's core business).
2. Cash flow from investment activities (cash received and used as a result of the purchase and sale of non-current assets).
3. Cash flow from financial activities (funds received and used in the course of activities affecting creditors and owners of the enterprise).
Obviously, such a report is well structured, and each section has its content and analytical value.
Cash Flow Statement
We will open the contents of each section of the report (Tables 8.2, 8.3).
Table 8.2. Cash Flows but Company Activities
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