Direct and indirect method of analyzing cash flows. Cash management

Successful business development requires the owners of the company, as well as its managers to implement effective management of the company's capital. In order for interested parties to assess how optimal its implementation, methods of analyzing cash flows, the turnover of which is carried out in the organization, can be used. What is their specificity? Which of the relevant methods can be attributed to the most common?

What is the analysis of cash flows for?

The organization's cash flows are key financial indicators of its activities. In order to effectively manage them, managers need to have information on their size, structure, as well as the types of economic activity within which the turnover of capital is carried out.

One of the most convenient and common tools through which you can get such information is considered to be the formation of an analytical report that reflects how the organization's cash flows move. This document can be useful for managers, investors, creditors and other persons interested in the success of the business.

What is the cash flow statement?

The analytical report on cash flows allows you to evaluate:

• Then, at the expense of which sources capital is formed in the organization;
• How the company's money is spent;
• Then, can an enterprise maintain the necessary profitability of a business sufficient to fulfill its obligations;
• Then, is the size and structure of cash flows optimal based on the tasks associated with business development.

The relevant analytical report allows you to assess the effectiveness of business management in general, to identify the strengths and weaknesses of the company's management and production infrastructure.

The considered source is compiled on the basis of accounting documents, such as balance sheet, financial statements of profit and loss. But with the accounting policy of the company, the analytical report on cash flows is not directly linked directly, and therefore managers can record objective data, which is reflected outside of the binding to the priorities that form in the process of building the corresponding policy.

Methods of analyzing the movement of capital

There are 3 main methods of analyzing cash to form a report, the specifics of which we have discussed above - direct, indirect, and coefficient. There are a number of features of their use.

In order to compile a report on the movement of capital, managers often compare two approaches - direct and indirect. The method of analyzing cash flows from the two marked, optimal for a particular organization, can be chosen on the basis of many factors. Sometimes - to supplement the coefficient approach.

Let us consider in more detail the features of each of the methods.

Direct method of capital analysis: general information

That approach, which is called direct, is considered somewhat more complicated. The fact that it involves the reflection of data on the movement of capital associated with operating activities, which requires access to a large number of accounting documents. A direct method of analyzing cash flows also involves disclosing in the report the main types of financial receipts to the firm's account, as well as the costs that arise as part of the implementation of the business model.

The main advantages of the method under consideration are the following:

• It gives managers the opportunity to show what sources generate capital and how they are spent;
• It allows you to determine the financiers of the organization the level of sufficiency of available funds in the firm, in terms of making payments on current obligations;
• The method in question is usually implemented in correlation with the established profit and expenditure plan, which makes it possible to give an objective assessment of its effectiveness;
• It allows you to determine the relationship between sales and revenue for a particular period of time.

An alternative to using a direct method of analyzing capital flows can be the use of an indirect approach. What are its most notable features?

Indirect method of capital analysis: general information

An indirect method of analyzing cash flows in a company is characterized by the fact that, with it, the profit or loss of the organization is adjusted based on the receipt of information on non-permanent financial transactions at the disposal of managers, and also changes that characterize the turnover of capital.

This method allows:

• To trace how the results of the firm's economic activity in one direction affect the performance in another area of production;
• Determine the relationship between the indicators of net profit and adjustments in the company's working capital structure within a given period.

Thus, advantages and disadvantages have both a direct and indirect method of analyzing cash flows. The choice of this or that approach depends, first of all, on the availability of the information necessary for studying the structure and movement of capital. If, for example, information on operational activities is not available, then implementing a direct method will be problematic, and in this case an indirect approach is applied. But if you have access to the necessary data, the first method can be the priority. Which of the approaches is optimal can be determined by competent managers taking into account current management tasks, investors' wishes and expert recommendations.

We will now study how the direct and indirect method of analyzing cash flows is applied in practice.

Direct method of analyzing the movement of capital: application in practice

Most often, the practical application of this approach is carried out using information recorded in the balance sheet of the company, as well as in the income statement. In this case, the use of the scheme is widespread, in which indicators such as:

• Net sales revenue;
• Dynamics of accounts receivable, accounts payable;
• Advances paid by counterparties;
• Payment for goods and services from customers;
• Cost of goods sold or produced;
• Dynamics of commodity stocks;
• Changes in the indicators characterizing the expenses of future periods;
• Basic production and administrative expenses ;
• Dynamics of the firm's obligations;
• Expenses related to the payment of services to suppliers, payment of salaries to employees, transfer of interest on loans;
• The dynamics of reserves intended for making payments;
• Amount of non-operating income;
• The dynamics of arrears and advances in the context of tax payments;
• Actual volume of transfers to the budget;
• Amount of capital flow from operating activities.

The noted scheme, within the framework of which the financial cash flow is analyzed, makes it possible to reliably estimate the effectiveness of money management. But it also has a disadvantage: it practically does not disclose how the financial result can depend on the size of the working capital of the company.

In practice, the analysis of the company's cash flows by a direct method can be particularly useful for companies that dispose of certain assets on the basis of operational control. This approach in this case will be useful from the point of view of control over whether the firm's capital is sufficient to fulfill its obligations taking into account the limited amount of funds and assets owned by the company on the basis of ownership.

It can also be noted that the direct method allows you to assess the level of liquidity of the firm's assets, as it involves the disclosure of the capital structure in various accounts, gives an opportunity to analyze what the firm needs in foreign capital - loans or investments, and also determine the ability of the company to pay back investments or repay loans Based on available resources and the dynamics of financial indicators.

Indirect method of capital analysis: application in practice

An indirect method of calculating and analyzing cash flows presupposes the implementation of actions by management in the following stages.

First, the company's financiers determine the amount of net profit. For this, information from accounting or tax reporting is used.

Secondly, the profit indicators are summed up with costs that are not directly related to the movement of capital - for example, it can be depreciation.

Thirdly, adjustments are made to the current assets and short-term liabilities of the firm.

The indirect method, thus, allows to trace how the capital of the organization is transformed into certain funds and assets. This approach is simpler than direct and can be implemented in a more timely manner.

Coefficient method

The methods of analyzing cash flows, both direct and indirect, are often supplemented by another approach, the coefficient approach. What is its specificity? Coefficient method of studying the structure and movement of the capital of the enterprise allows:

• To study the degree of deviation of financial flows relative to planned and optimal indicators;
• To analyze the efficiency of capital investment in production;
• Assess the quality of financial management of the organization.

The method under consideration, which is obviously based on its name, involves the use of a number of coefficients for the analysis of cash flows. Which of them can be called the most popular?

These can be coefficients:

• Sufficiency of net capital;
• The effectiveness of financial flows;
• Reinvestment.

The first factor allows to determine whether the organization needs additional funds to meet current financial obligations. The second relates to generalizing indicators and allows you to assess how stable the dynamics of capital development in the firm and how it relates to the outflow of investment. In turn, the use of the third coefficient can help to identify factors that affect the dynamics of the formation of new non-current assets of the firm, which, as a rule, reflects the influx of investments into the company.

Application of the results of the analysis of the movement of capital

So, we have considered the most common methods of analyzing cash flows in an organization. It will also be useful to study how the results of such an analysis can be put into practice.

A direct, indirect, coefficient method of analyzing cash flows allows the management of the firm and other interested parties to first get an idea of what specific financial transactions were carried out in the company during the reporting period and in which volume indicators. The given data can be used at an estimation of efficiency of management by capitals, with a view of optimization of a business model of the company. Current information about the dynamics of cash flows in the company can be useful to investors who make decisions about investing in the company, lenders, partners.

Reliable data on the movement of capital in the organization allow you to organize effective management of it. Let's study this aspect in more detail.

Dynamics of the movement of capital as a factor in optimizing the management of the company's finances

The main methods of analyzing cash flows that we have studied allow management to consider, first of all, the structure of the firm's capital at various levels. As a result, they have data that can be used to identify shortcomings in the management of the company's finances.

For example, the analysis of cash flows by direct, indirect or coefficient method can show that excessive financing of one line of business does not predetermine a significant increase in profitability, while investing capital in another production sphere can, in turn, significantly stimulate revenue growth. If the relevant analysis is not carried out, then it is problematic to identify the areas of activity in which to invest particularly actively.

Studying the dynamics of the company's turnover of capital using the methods we examined can allow the management to determine in which units of the company the funds are most effectively absorbed. So, the analysis can show that with the same amount of investment in one intracorporate structure, profitability is higher, and in the other - lower. If you do not conduct an appropriate research, it may be difficult to determine the most effective division of a company, especially if it is a large business.

Capital management is an important component of business development. The extent to which the system, within which it is implemented, and how reliable the methods of its evaluation will be, will greatly influence the competitiveness of the firm. Two organizations operating in the same segment and having the same capitalization may show different profitability, which may be due to a more efficient capital management system in any of the firms. Among the most significant criteria for its alignment is the ability of management to investigate, reliably evaluate and optimize the corresponding system.

For this, the approaches we have studied can be involved. Thus, the direct and indirect method of analyzing cash flows, supplemented by a coefficient method, where necessary, are modern and accessible tools for studying the structure of capital in an organization, assessing the quality of managing financial flows and investing in production. The choice of this or that method depends on the degree of availability of the required information, current management tasks related to the assessment of the effectiveness of money management, the wishes of owners, investors or expert advice.