Cash flows are a key element in investment decision-making

Accounting and management accounting, carried out in modern conditions, is quite difficult to analyze, because the indicators that are obtained on its basis are in essence abstract values not related to real money flows. However, the investor, first of all, is interested directly in cash flows. This is because the availability of money at the moment is more important to him than having it in the distant future. The indicator of profit does not reflect this fact.

Thus, it is necessary to analyze in more detail the concept of money flow and the associated concept of the time value of money. Cash flows - is the receipt of funds on the company's accounts, as well as their spending, regardless of how they were extracted or spent. In fact, in modern management there are three main areas that affect the cash flow.

The first direction is the cash flow from operating activities. In this case, the money is transferred to the company's accounts as a result of sales of goods and services. The cost of the same money goes to purchase raw materials, pay salaries, rent office, etc. Ideally, this kind of cash flow should be close to the profit of the enterprise, but sales on credit, as well as deferrals on payments to suppliers, are the reasons for significant discrepancies in these figures.

In addition, investment costs and revenues can have a significant impact on cash flows. This is the second direction, which is investigated in the classical analysis. The company's investment is nothing more than the exchange of some assets for others, which can in the long run bring profit to the company. Such operations include, for example, the purchase of equipment for the production of goods or the purchase of shares of other companies. As the inflow of cash funds are the funds received from the sale of investment assets or dividends received from them.

The third direction is financial operations. The inflow of funds in this case is formed at the expense of loans taken to enterprises, and the outflow, respectively, at the expense of the funds spent on the return of these loans, as well as interest payments. Financial transactions are the most important source of cash flows, especially at the initial stages of business development.

Counting the inflow and outflow of cash that is generated as a result of the company's economic operations in these areas, we should not forget about the time value of money. The cash flow analysis should be carried out taking into account the time period at which the funds will be received . The logic of this statement is simple. An investor can invest free money in his hands in any project, including a bank. The more time passes since the moment of investing, the greater the amount of money that the investor will receive, so that the result of investments exceeds potential investments in other projects.

Thus, cash flows are, in classical investment management, cash reconciled with current interest rates. The later the funds are received by the company, the less is their real value at the moment. This explains the fact that some companies that show good profit figures are unprofitable for investors and may find themselves without sources of financing. Therefore, one should not focus on planning on profit alone, but look at the situation through the eyes of the investor, who expects to receive not only as much money as possible, but also to receive them as soon as possible.