In the world of business and finance there are two terms abbreviated as CF: Cash Flow and Company Finance.
Profit has traditionally been the main indicator for evaluating a company's performance. However, in addition to it, there are other indicators of the enterprise's activity by which its prospects can be assessed. One of the main ones can be called an indicator of cash flow actively used in Europe.
Its value allows you to obtain information about the real funds available to the enterprise, which can often differ significantly from the figures indicated in the balance sheet and the income statement.
Below it will be described who and how regulates cash flows, what is the economic essence of the indicator, its varieties, scope and differences from other numerical characteristics of the economic activity of the enterprise are considered.
Cash flow is the most important indicator that reflects the company's development prospects. This term is abbreviated in capital letters CF.
Cash Flow is the actual cash flow of an enterprise, both in cash and in accounts. When calculating the indicator, both inflows, such as profits, and outflows, such as any real costs, are taken into account. It can calculate both for the company as a whole and for a separate business segment, investment project or even a product.
But for a more complete identification of the performance of an enterprise, a simple-to-calculate value is most often used - net cash flow, more precisely - the gap between the inflow of money supply and spending for a selected calendar period. This term can be positive or negative.
Net cash flow can be calculated as follows:
NCF = ∑+CFp - ∑-Cfr
+CFp - crediting funds to the company's account
-Cfr - write-offs from her account
The final value of cash flow can be either positive, which means that the company has free funds, or negative. In the second case, we can say that if adverse events occur, the firm will experience difficulties with liquidity to get out of the situation.
The main value of cash flows used for analysis is Net Cash Flow. It represents the difference between all positive and all negative flows of the company. This indicator allows you to determine the amount of free cash at the disposal of the company. However, in addition to it, there are several ways to calculate the values related to the organization's cash flows.
Free Cash Flow to Firm, abbreviated as FCFF, is another important indicator in a company's financial report. In the classical sense, the indicator shows the volume of all cash received by the company, minus the cost of expanding or maintaining its asset base, determined by the Capex indicator. Its value serves to analyze the ability of the enterprise to pay off its current obligations without using the funds involved in non-current assets.
The main difference between FCFF and CF lies in the nuances. The first reflects net income for any period of time. And their values are not always equal, because when calculating profit, it does not take into account all operations that are taken into account when calculating some cash transfers (for example, crediting subsidies or loans to the company’s account, paying loans, it also does not take into account part of the costs that affect income, but not real cash costs (for example, depreciation).
Corporate finance is a division of finance that deals with how corporations deal with funding sources, capital structuring and investment decisions. Corporate finance is primarily concerned with maximizing shareholder value through long-term and short-term financial planning and the implementation of various strategies. Corporate finance activities range from investment decisions to investment banking.
Corporate finance departments are responsible for managing and overseeing their companies' financial activities and capital investment decisions. These decisions include whether to continue with the proposed investment and whether to pay for it with equity, debt, or both.
Corporate finance is often linked to a firm's decision to make capital investments and other investment-related decisions.
Corporate finance manages short-term financial decisions that affect operations.
In addition to capital investments, corporate finance is concerned with raising capital.
It also includes whether shareholders should receive dividends. In addition, the finance department manages current assets, current liabilities and inventory.
The tasks of corporate finance include capital investments and the allocation of long-term capital of the company. The capital investment decision process is primarily concerned with capital budgeting. Through capital budgeting, a company determines capital costs, estimates future cash flows from proposed capital projects, compares planned investments with potential receipts, and decides which projects to include in its capital budget.
Making capital investments is perhaps the most important task of corporate finance, which can have serious business implications. Poor planning of capital investments (for example, overinvestment or underfunding of investments) can jeopardize a company's financial position, either through increased financial costs or insufficient production capacity.
Corporate finance includes the activities involved in making finance, investment and capital budget decisions for a corporation.
Corporate finance is also responsible for raising capital in the form of debt or equity. The Company may borrow from commercial banks and other financial intermediaries or issue debt securities in the capital markets through investment banks (IBs). The company may also sell shares to equity investors, especially when large capital is needed to expand the business.
Equity financing is a balancing act in terms of deciding on the relative amounts or weights between debt and equity. Having too much debt can increase the risk of default, and a heavy reliance on equity can reduce returns and value for early investors. Ultimately, capital financing must provide the capital needed to make capital investments.
Corporate finance is also tasked with short-term financial management, the purpose of which is to provide sufficient liquidity to continue operations. Short-term financial management concerns current assets and current liabilities or working capital and operating cash flows. The company must be able to meet all of its current obligations on time. This presupposes the presence of a sufficient amount of current liquid assets so as not to disrupt the operation of the company. Short-term financial management may also include obtaining additional lines of credit or issuing commercial paper as reserve liquidity.