2.6. Analysis of Cash flows

Cash of the company is one of the most important aspects of its strategic financial management, since in the absence of it company cannot conduct business activity and will be forced to cease its existence. Cash is needed for purchase of raw materials, salary payments, implementation of investments, tax payment, dividends, etc. But itself cash not generate revenues, so the primary objective of the policy of cash management is maintaining it at the lowest appropriate level, sufficient for implementation of effective financial and economic activity.

But first of all it is necessary to conduct a retrospective analysis of the company's cash flow and find its value during the report timeframe, basic elements of cash flow, value of cash flows in the context of different activities.

In accordance with international standards, there are three main groups of cash flows: from operating, investing and financing activities.

Inflows from operating activity of the company are formed by revenues from the sale of goods (works, services), collection of receivables advances received from customer. Operating outflows consist of paid invoices of suppliers and contractors, paid salaries, payments to budgetary and extrabudgetary funds, current interest paid for the credit (in part, included in non-operating expenses), etc.

Cash outflows from investing activities include the cost of purchased fixed assets, investments to new construction, acquisition of companies or packages of their shares, loans and credits to other companies. Investment inflows are formed by revenues from sales of fixed assets or construction in progress, costs of sold shares of other companies, long-term debt repayments, the amounts of dividends received by the company during the ownership of shares or interest paid the debtor during the use of long-term loans and credits.

Inflows from financial activities include the amount of the proceeds from issue of new shares or bonds, short-and long-term loans obtained from banks or other businesses, targeted funding from various sources. Outflows include loan repayments, the repayment of bonds, redemption, and dividend payment. To finance also relate operations with short-term market instruments (short-term investments).

Information on the cash flows of the company is grouped in the “Statement of Cash Flows.” It gives the following information:

• The organization's ability to get the increase in cash by ordinary course of business;

• The ability of the organization to meet its financial obligations, pay dividends and be creditworthy now and in the future;

• Impact on the organization's financial condition of its investment and financial transactions related and not related to the movement of cash;

• The value of anticipated external financing needs.

Below there is an analysis of cash flow by context of various activities conducted (see Appendix 5). Horizontal and vertical analysis of the statement of cash flows was carried out. Indicators of horizontal analysis are given by graphs 7-9.

Thus, for this period company received 365 million rubles. In this 88% of the total gross cash inflows accounted to current activity and 12% - to financial activities.

Vertical analysis data (graphs 10-12) allows the conclusion that up to 100% of gross cash inflow from operating activities was provided by revenues from customers and clients. A significant proportion of revenues from buyers and customers indicates that the analyzed enterprise receives income primarily from its core business.

Positive cash flow in the financial field to 100% is caused by increase of borrowed funds, obtaining loans. Cash outflows for all activities of the analyzed period are 377 million rubles. Of them current payments account for the largest portion - 94%, the financial - 6%.

Vertical analysis shows that 32% of all cash outflows by normal course of business amounts to payments for purchased goods (works, services, etc.), 68% - wages, including payments by state budget funds, payment of taxes and levies, dividends paid, interest paid, cash on account and other payments.

Return of loans amounts to 100% cash outflow for financing activities.

Total gross cash outflow exceeds inflow, resulting in overall decrease in cash flows.

Assessment of the movement of funds can be performed by using the calculation of liquidity cash flow (LCF) for rapid diagnostics of the financial state of the organization:

LCF = (FL₁ + CL₁ – CASH₁) – (FL₀ + CL₀ – CASH₀), (2.6.1)

where FL₁, FL₀ - long-term loans at the end and beginning of the period;

CL₁, CL₀ - short-term loans at the beginning and end of the period;

CASH₁, CASH₀ - cash on hand, at current and currency accounts in banks at the end and beginning of the period.

Liquidity cash flow is an indicator of excess or deficit cash balances of the organization. Its difference from other indicators of liquidity consists in that liquidity ratios reflect the organization's ability to repay its obligations to external creditors, and liquidity cash flow characterizes the absolute value of the cash generated from its own activities. It is an internal indicator of the organization's performance and is important for both creditors and investors.

Table 2.6.1. Calculation of liquidity cash flow

	LCF	FL1	FL0	CL1	CL0	CASH1	CASH0
2006	-1 867	8 500	12 500	0	0	4 111	6 244
2007	19 006	45 950	8 500	0	0	22 555	4 111
2008	-11 421	18 373	45 950	6 000	0	12 399	22 555
2009	21 107	29 570	18 373	4 676	6 000	1 165	12 399