Analysis of cash flows of the organization: educational manual 9786010420601

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AL-FARABI KAZAKH NATIONAL UNIVERSITY

R. E. Janshanlo G. A. Alimbekova

ANALYSIS OF CASH FLOWS OF THE ORGANIZATION Educational manual

Almaty «Qazaq university» 2016

UDС 336.7 (075.8) LBC 65.26.2.6 я 73 J 27 Recommended for publication by the decision of the Academic Council of the Faculty of high school of Economics and business and Editorial and Publishing Council of the Kazakh National University named after Al-Farabi (Protocol №4 dated 13.07.2017 у.) Reviewers: doctor of Economics, professor K.Sh. Dyusembayev doctor of Economics, professor A.M. Baydildina doctor of Economics, professor N.N. Ibrishev doctoral candidate (PhD) G.A. Alimbekova



Janshanlo R.E.

J 27 Analysis of cash flows of the organization: educational manual / R.E. Janshanlo, G.A. Alimbekova. – Almaty: Qazaq university, 2016. – 148 р. ISBN 978-601-04-2060-1 The manual is devoted to consideration of an actual problem of financial man-agement – to the analysis of cash flows of the organization. In it theoretical bases and methodological aspects of an assessment and the analysis of cash flows are briefly stated. Thus questions of carrying out the horizontal, vertical and factorial analysis are followed by practical examples. It is intended for bachelors, undergraduates, doctoral candidates of PhD, listeners of system of training of professional accountants, auditors and analysts. Educational manual is published in authorial release. Пособие посвящено рассмотрению актуальной проблемы финансового управ­­ ления – анализу денежных потоков организации. В нем изложены тео­ре­тические основы и методологические аспекты оценки и анализа денежных пото­­ков, освещены вопросы проведения горизонтального, вертикального и фак­­торного анализов на основе практических примеров. Предназначено для бакалавров, магистрантов, докторантов PhD, слушателей программ подготовки профессиональных бухгалтеров, аудиторов и аналитиков. Учебное пособие издается в авторской редакции.

UDС 336.7 (075.8) LBC 65.26.2.6 я 73 ISBN 978-601-04-2060-1

© Janshanlo R.E., Alimbekova G.A., 2016 © Al-Farabi KazNU, 2016

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SYMBOLS

A – the indicator reflecting quality of realization of a basic purpose of system (for example, a certain system quality or emergent properties); Aas – average size of assets; As-t – short-term assets; As-t.n – short–term assets in the period of n; As-t.n–1 – short-term assets during the previous period; AEm.i – article of an expenditure of money; ARm.i – article of receipt of money; Сс – compensation with charges; Cl.cf – coefficient of liquidity of a cash flow; Cas – coefficient of absolute solvency; Ccs – coefficient of the current solvency; Cis – coefficient of intermediate solvency; Csm – coefficient of security with money; Cs.cf.pur – coefficient of sufficiency of a pure cash flow; Ce.cf.pur – coefficient of efficiency of a pure cash flow; Cp.cf.pos – coefficient of profitability of a positive cash flow; Cp.cf.neg – coefficient of profitability of a negative cash flow; Cp.cf.pur – coefficient of profitability of a pure cash flow; Cpm.as – coefficient of profitability of average size of money; Ctm – coefficient of turnover of money; Ctm.as – coefficient of turnover of average size of money; Cp.ps – coefficient of profitability of product sales; CFpur – a pure cash flow; CFpur.oa – pure cash flow from operating activities; CFpur.ia – pure cash flow from investment activity; CFpur.fa – pure cash flow from financial activity; CFpos – a positive cash flow; CFneg – a negative cash flow; CFpos.oa – a positive cash flow from operating activities; CFneg.oa – a negative cash flow from operating activities; CLl-t.1 – the long-term credits and loans for the end of the settlement period; CLs-t.1 – the short-term credits and loans for the end of the settlement period; 3

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Analysis of cash flows of the organization

CLl-t.0 – the long-term credits and loans for the beginning of the settlement period; CLs-t.0 – the short-term credits and loans for the beginning of the settlement period; CSap – calculations with suppliers (the accounts payable extinguished in the re-porting period); Dpo – the dividends paid to owners of the organization for the period; DFA – depreciation of fixed assets; EPa – economic profitability of assets, %; (EPa – rk.av) – differential of financial leverage; FIs–t – the sum of short-term financial investments; LC – the loan capital; (LC / OC) – debt coefficient (financial dependence); M – the sum of money; M0 – money for the beginning of the settlement period; M1 – money for the end of the settlement period; Мa – the actual cash flow; Mar – arrived money for the studied period; Mas – the average size of money; Mbeg – the rest of money for the beginning of the analyzed period; Mend – the rest of money for the end of the analyzed period; Mn – money in the period of n; Mn–1 – money during the previous period; Mn.b – a net balance of money for the period; Mop.oa – other payments of money in the course of operating activities; Mor.oa – other receipts of money in the course of operating activities; Mpa.ii – the money paid for acquisition of inventory items – raw materials, materials and semi-finished products at suppliers; Mp.s – the money received from product sales; Mrd – sums of monetary receipts from debtors; Msp – it is spent money for the studied period; MI – material inputs; MS – the sum of the material inputs included in product cost; NP – net profit; Os-t – the sum of short-term obligations; OC – own capital; OCas – average size of own capital; Р – proceeds from sales of production; PFRr – article (look) of reduction of pure financial result;

Symbols

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PFRi – article (look) of increase in pure financial result; PM – the volume of purchases of materials for the reporting period; PPCLl.s-t – the sum of payments of a principal debt on the long and short-term credits and loans; Rs-t – the sum of short-term receivables; RIT – a rate of income tax in points; SPa-m.p – the salary paid to the administrative and managerial personnel; SPo.p – the salary paid to operation personnel; TPb – the tax payments transferred into the budget; TPo-b.f – the tax payments listed in off-budget funds; ΔAP – a gain (decrease) of accounts payable; ΔAR – a gain (decrease) of accounts receivable; ΔCLl-t – change of the sum of the long-term credits and loans; ΔCLs–t – change of the sum of the short-term credits and loans; ΔIA – change of the sum of intangible assets; ΔICI – change of the sum of incomplete capital investments; ΔFA – change of the sum of fixed assets; ΔFIl-t – change of the sum of long-term financial investments; ΔFIs-t – change of the sum of short-term financial investments; ΔMS – a gain (decrease) of material stocks; ΔGSIIap.s-t – the sum of a gain of stocks of inventory items as a part of short-term assets; ΔOAl-t – change of the sum of other long-term assets; ΔOC – change of the sum of own capital; rcpt – a rate of corporate income tax (unit share); rk.av – an average interest rate for the credit; (1 – rcpt) – tax proofreader of financial leverage; a1, a2, a3,…, an – parameters on which this system quality depends; х1 – salary capacity; х2 – material capacity; х3 – depreciation capacity; х4 – turnover of assets; х5 – share of the average rest of money in the total amount of a positive cash flow; х6 – share of the average rest of money in the total amount of assets.

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PREFACE

The majority of types of economic operations of the organization in this or that form is connected with receipt or leaving of money. For implementation of the expenses the organization has to provide adequate inflow of money supply in a type of income from realization of goods and services, receipt of dividends on the invested capital, receiving temporary loan money, etc. Money is a limited resource therefore creation in the organizations of the mechanism of effective management of their movement which would promote ensuring economic processes with the necessary level of cash flows and maintenance of the optimum rest of money by regulation of balance of their receipt and an expenditure is important. In the conditions of constantly changing economic situation (external and internal) creation of such mechanism requires existence of analytical information on cash flows of the organization and conditions of their formation. And for ensuring elasticity of administrative system, that is its ability quickly to react to the happening changes, to focus limited resources on the vital, priority directions more actual are results not of the current, but expected analysis allowing to control not simply, and to expect a situation. However the majority of the offered methodical development according to cash flows of the organization have retrospective character. Besides direct and indirect methods which mainly are considered in economic literature, are applied separately from each other. It doesn’t allow to reveal joint influence of straight lines and indirect factors on cash flows of the organization, and also on a deviation of a net balance of the money from pure financial result received by the organization for the same period of time. That, in turn, doesn’t give the chance to bring analytical research to concrete actions, and, therefore, to use these methods when forecasting cash flows, at determination of their possible volume in case of adoption of this or that administrative decision. 6

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In a basis of calculations the percentage ratio of the indicators defining cash flow of the organization which developed during the previous periods taking into account their possible changes in the future is, as a rule, put. Thus in most cases the main attention is given to questions of collection of receivables and repayment of accounts payable regarding calculations with suppliers and contractors, as to the most essential components of cash flows. Other indicators of sources and the directions of use of money admit difficult predictable and are practically not considered. Therefore one of problems of market economy is maintenance of balance between the high level of profitability of work of the organization and its sufficient solvency today. The solution of this task first of all is based on skillful management of cash flows. Management of cash flows is of particular importance during formation of economy when in the conditions of the unstable economic environment, absence or not the correct management of money can lead to financial crash even the profitable organization. The successful solution of the financial problems arising in the organizations in many respects depends on creation and use of a certain control system of money which main components is accurately adjusted system of the account, implementation of the analysis and advance financial planning of cash flows. The analysis of the movement of cash flows gives the chance to draw more valid conclusions on in what volume and from what sources the money and what main directions of their use which came to the organization were received; whether the organization for the short-term obligations is capable to answer; whether enough own means of the organization for implementation of investment activity; than divergences of size of the got profit and existence of money, etc. speak. The purpose of this manual – to consider the main questions of an assessment and the analysis of cash flows of the organization.

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1. Theory of the analysis of cash flows

1. THEORY OF THE ANALYSIS OF CASH FLOWS

1.1. Essence and classification of cash flows Many economists agree in opinion that money in the conditions of market economy acts as the most limited resource therefore very important is an achievement of the maximum economic effect of operations with them. Besides funds of the organization represent the only type of resources which directly and with the minimum expenses is transformed to other types of the resources necessary for normal process of economic activity. However money in itself is non-profitable assets. Their commercial usefulness and efficiency is shown when they are involved in economic circulation and are in the movement. In the middle of the XIX century scientists paid attention to socalled paradox of profit which essence was as follows: the organization has no money, but there is a profit, or there is money, but there is no profit. The limit case of the called paradox when the organization which showed profit in the report was declared bankrupt became possible even. The need for an economic explanation of similar situations defined need of allocation for the scientific device of the concept «cash flow» as independent economic category. Historically it occurred relatively recently – only in the first half of the XX century. The concept of cash flows as «cash flow» for the first time appeared in economic literature of the USA after World War II. Now this term having an Anglo-Saxon origin, gained the international recognition and is in free use in many countries. In economic literature (both foreign, and Kazakhstan) the economic essence of cash flows of the organizations is treated differently that proves that the cash flow as category of a market economy is a difficult multidimensional phenomenon: 8

1.1. Essence and classification of cash flows

Cash flow organizations

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– a difference between all money received and paid by the organization for a certain period – inflow and outflow of money – set distributed on separate intervals of the considered period of time of receipts and payments of the money generated by its economic activity which movement is connected with factors of time, risk and liquidity

The gain of cash flows arises from a gross revenue of the organization which creates prerequisites for expanded reproduction. In the course of a circulation the capital passes from a monetary form in productive, commodity and again into the monetary. In each time point separate parts of the capital are only in one form. From here it is possible to conclude that the cash flow represents cash flow in the form of their receipt and an expenditure. Receipt (inflow) of money is called as a positive cash flow, an expense (outflow) of money – a negative cash flow. The difference between positive and negative cash flows on each kind of activity or on economic activity of the organization in general is called as a pure cash flow. The actual change of free funds of the organization for a certain interval of the analysis carries the name the actual cash flow. The actual cash flow pays off on the basis of data on the size of the funds of the organization reflected in the balance sheet (a line 010 «Money and their equivalents»). The difference between a pure and actual cash flow represents non-productive consumption. Financial wellbeing of the organization in many respects depends on inflow of the money providing a covering of its obligations. The lack of money can negatively be reflected in activity of the organization and result in insolvency, reduction of the liquidity, un profitability and the termination of functioning. Surplus of money can be familiar that the organization sustains losses. The reason of these losses can be connected both with inflation and depreciation of money, and with the missed possibility of their favorable placement and obtaining the additional income. Anyway the

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1. Theory of the analysis of cash flows

analysis of cash flows will allow to establish a real financial position of the organization. Cash flows can be classified by types of economic activity. According to the international standards of the account allocate such types of cash flows: 1. On scales of service of economic process allocate the following types of cash flows: –– a cash flow on the organization in general – the most aggregated type of a cash flow which accumulates all types of the cash flows serving economic process of the organization in general; –– a cash flow by separate types of economic activity of the organization – result of differentiation of a cumulative cash flow of the organization in a section of separate types of its economic activity; –– the cash flow – determines it by separate structural divisions (the centers of responsibility) as independent object of management in system of organizational and economic construction; –– the cash flow on separate economic operations – is considered as primary object of independent management. 2. On kinds of activity allocate the following types of cash flows: –– operating activities. Inflow of money: proceeds from sales of goods and services, receipts of receivables, from sale of material values and barter; advance payments of buyers. Outflow of money: payments to suppliers, payment of a salary, payments in the budget and off-budget funds, payment of percent for the credit, repayment of accounts payable; –– investment activity. Inflow of money: realization of fixed assets, intangible assets, complete construction; receipt of funds from realization of long-term assets; dividends, percent from long-term financial investments. Outflow of money: capital investments on production development, long-term financial investments; –– financial activity. Inflow of money: short-term credits and loans; long-term credits and loans; receipts from implementation

1.1. Essence and classification of cash flows

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of bills and payment by their debtors, from issue of shares; target financing. Outflow of money: repayment of short-term obligations, long-term credits and loans; payment of dividends. The sum of cash flows in the considered higher than three directions of economic activity of the organization forms a pure cash flow. The size of a pure cash flow can be considered as potential amount of money which the organization for results of the activity has to have. 3. On an orientation of cash flow allocate two main types of cash flows: 1) the positive – characterizing set of receipts of money in the organization from all types of economic operations (in quality of analog of this term the term «inflow of money» is used); 2) the negative – defines set of payments of money by the organization in the course of implementation of all types of economic operations (as analog of this term the term «outflow of money» is used). 4. On a method of calculation of volume allocate the following types of cash flows of the organization: –– the gross – characterizes all set of receipts or an expenditure of money in the considered time period in a section of its separate intervals; –– the pure – defines a difference between positive and negative cash flows (between receipt and an expenditure of money) in the considered time period in a section of its separate intervals. The pure cash flow is the most important result of financial activity of the organization in many respects defining financial balance and rates of increase of its market value. Calculation of a pure cash flow for the organization in general, to its separate structural divisions (the centers of responsibility), different types of economic activity or separate economic operations is carried out on the following formula: CFpur = CFpos - CFneg. 5. On the level of sufficiency of volume allocate the following types of monetary streams of the organization:

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1. Theory of the analysis of cash flows

–– the superfluous – characterizes such cash flow at which receipts of money significantly exceed real need of the organization for their purposeful expenditure. The certificate of an excess cash flow is the high positive size of the pure cash flow which isn’t used in the course of implementation of financial and economic activity of the organization; –– he scarce – defines such cash flow at which receipts of money are significantly lower than real needs of the organization for their purposeful expenditure. Even at positive value of the sum of a pure cash flow it can be characterized as scarce if this sum doesn’t provide planned need for an expenditure of money in all provided directions of financial and economic activity of the organization. Negative value of the sum of a pure cash flow automatically does this stream scarce. 6. On an assessment method in time allocate the following types of cash flows: –– the real – characterizes a cash flow of the organization as its uniform comparable size specified at cost to a present situation of time; –– the future – defines a cash flow of the organization as its uniform comparable size specified at cost to a concrete forthcoming time point. 7. On a formation continuity in the considered period distinguish the following types of cash flows of the organization: –– the regular – characterizes a stream of receipt or an expenditure of money on separate financial and economic activities (cash flows of one look) which in the considered period of time is carried out constantly on separate intervals of this period; –– the discrete – defines the receipt or an expenditure of money connected with implementation of single financial and economic activities of the organization in the considered time period. 8. On stability of time intervals of formation regular cash flows are characterized by the following types:

1.1. Essence and classification of cash flows

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–– the regular cash flow with uniform time intervals within the considered period – has character of annuity; –– a regular cash flow with uneven temporary intervals within the considered period – the schedule of leasing payments for the rented property with the uneven intervals of time of their implementation coordinated by the parties throughout the term of rent of an asset. 9. On liquidity or change of a pure credit position of the organization during the certain period allocate the following types of cash flows: –– the liquid – is one of indicators by means of which estimate change of a financial position of the organization in time and characterize change in a pure credit position of the organization during the period. Thus the pure credit position is a positive difference between the sum of the credits obtained by the organization, and size of money; –– the illiquid – characterizes on negative change in a pure credit position of the organization during the period. Thus understand a negative difference between the sum of the credits obtained by the organization, and size of money as a pure credit position. 10. On features of alternation of inflows and outflows in time cash flows can be: –– the relevant – in them the stream with the sign �������������� «������������� minus�������� »������� changes on a stream with the sign «plus» once. Relevant cash flows are characteristic for standard, typical and simplest investment projects in which behind a stage of initial investment of the capital, that is outflow of money, long receipts, that is inflow of money follow; –– he irrelevant – for them the situation when outflow and inflow of the capital alternate is peculiar. 11. On nature of balance cash flows subdivide on: –– the softly balanced - is based on balance of a scarce stream in the long-term period when outside one fiscal year deficiency of a cash flow from investment activity is overcome and streams

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1. Theory of the analysis of cash flows

from operating and financial activities are subordinated to it. This type of balance is connected with an investment orientation of development of the organization; –– the rigidly balanced - is based on balance of a scarce stream in the short-term period on system «accelerations of attraction of money – delays of payments of money» when within one fiscal year deficiency of a stream from operating activities as primary activity is overcome and to it are subordinated shortterm financial and investment to activity. This type of balance is connected with maintenance of the current financial stability, solvency and liquidity, focused on short investments of the speculative nature. 12. On riskiness degree cash flows happen: –– the high risk – represent a cash flow of innovative projects, especially in an initial stage of their life cycle that is connected with risky investments into innovations. Thus the highest riskiness of streams is observed at financial and investment activity before passing of a point of payback or return of investments of the project, and smaller riskiness – at operational; –– the low-risky – exist at traditional kinds of activity of the organization, especially in the period of peak of life cycle that is connected with stable generation of the high income during «removal of cream in the market». Thus low riskiness of cash flows is observed from operating activities. 13. On predictability allocate the following types of cash flows: –– the predicted – when activity of the organization is carried out in rather stable financial and economic and political environment, many external negative factors are neutralized, and internal factors are predicted on stories of a sustainable development within representative statistical selections, that is systematic risks are neutralized by government policy, and technical internal risks are predicted with high degree of probability; –– not predicted – when activity of the organization is carried out in the unstable financial and economic and political

1.1. Essence and classification of cash flows

15

environment, many external negative factors prove as uncertainty, and internal factors are predicted because of not representative statistical selections by expert methods, that is systematic risks have the high level of uncertainty and are almost not predicted because of crisis of government stabilization policy, and technical internal risks are predicted with low degree of probability. 14. On controllability cash flows can be: –– the operated – represent domination of those monetary in flows and outflows which the organization can operate, carrying out more active operational and passive financial and investment activity so that to develop on the basis of selfsufficiency and self-financing, that is financially independent and independent development of the organization at the expense of the internal reserves; –– the uncontrollable – represent domination of those monetary inflows and outflows which the organization can’t operate, carrying out active financial and investment activity generally on the basis of large-scale external loans at scanty own means and internal reserves. 15. On controllability cash flows subdivide on: –– the controlled – the stream, inflows and which outflows give in to forecasting and management which balance is formed at the most insignificant deviation from the planned level, that is «������������������������������������������������������������� the plan - the fact - the deviation�������������������������� »������������������������� is minimum by intermediate and final financial results; –– the uncontrollable – the stream, inflows and which outflows don’t give in to forecasting and management, the balance of a stream is formed at a considerable deviation from the planned level, that is «the plan - the fact - the deviation» is maximum both on intermediate, and by final financial results. 16. Whenever possible synchronization cash flows happen: –– the synchronized – a stream at which inflows will be coordinated from time of outflows to the temporary period taking into account seasonal and cyclic distinctions in receipts and an

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1. Theory of the analysis of cash flows

expenditure of money. Thus correlation level between positive and negative cash flows strives for +1 value; –– not synchronized – a stream at which inflows won’t be coordinated from time of outflows to the temporary period because of essential seasonal and cyclic distinctions in receipts and an expenditure of money. Thus there is a considerable decrease in level of correlation between positive and negative cash flows. 17. Whenever possible optimization distinguish cash flows: –– the optimized – the stream, inflows and which outflows give in to alignment and synchronization in time, to smoothing of volumes of inflow and outflow in a section of separate intervals of the temporary period with elimination of essential influence of seasonal and cyclic changes in formation of streams when the average remains of money correspond to average financial requirements of the organization; –– not optimized – the stream, inflows and which outflows don’t give in to alignment and synchronization in time, volumes of inflow and outflow don’t smooth out in a section of separate intervals of the temporary period because of essential influence of seasonal and cyclic changes in formation of streams when the average remains of money don’t correspond considerably to average financial requirements of the organization. 18. By efficiency concerning profitability indicators cash flows divide on: –– the effective – a stream which soft balance at the same time promotes profitability growth, especially in such a way that is provided to profitability of own capital the steady growth of the organization, and indicators of financial stability and profitability improve at the same time; –– inefficient, but balanced – the stream which rigid balance occurs due to decrease or loss of profitability, especially profitability of own capital in such a way that is provided chronic un profitability after a covering of short-term obligations, and an indicator of strengthening of the current

1.1. Essence and classification of cash flows

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financial stability, solvency, liquidities improves at the price of profitability loss. The considered classification allows to carry out more purposefully the account, the analysis and planning of cash flows of different types in the organization. Both deficiency, and surplus of monetary resources negatively influence on financial position of the organization. At an excess cash flow there is a loss of real cost of temporarily free money as a result of inflation, the part of the potential income from not before use of money is lost, turnover of the capital as a result of idle time of money is slowed down. Existence of an excess cash flow throughout a long time can be result of misuse of working capital. That money worked in the organization, it is necessary to put them into circulation for the purpose of receiving profit: to expand the production, to update fixed assets, to get new technologies, to invest in profitable projects of other economic entities for the purpose of receiving favorable percent, ahead of schedule to repay the loans of bank and other obligations, etc. Deficiency of money leads to growth of arrears of the organization for the credits to bank, suppliers, to the personnel on compensation therefore the sum of financial expenses increases and profitability of the capital of the organization decreases. It is possible to reduce deficiency of a cash flow due to the actions promoting acceleration of receipt of money and delay of their payments. The qualitative characteristic of cash flows can be estimated by cyclic sequence of the economic processes happening in the organization. From here cash flows of the organization have to be considered not simply as process of receiving and payment of money, and as passing process by the capital of the organization of certain stages of its production and financial activity. In that case the cycle of cash flows will correspond to a circulation of economic means of the organization that is especially important at creation of the effective mechanism of management of them. Effective management of cash flows: –– provides financial balance of the organization in the course of its development. Rates of this development and financial

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1. Theory of the analysis of cash flows

stability considerably are defined by that, how different types of cash flows are synchronized on volumes and in time. High level of such synchronization provides essential acceleration of realization of strategic objectives of development of the organization; –– allows to reduce need of the organization for the loan capital. Actively operating cash flows, it is possible to provide more rational and economical use of own financial resources, to reduce dependence of the organization on the attracted loans; –– provides decrease in risk of insolvency. Sources of money accumulate the organization for formation of assets necessary for it for implementation of all types of financial and economic activity as at the expense of own income, accumulation and the capital, and due to different receipts. Formation of cash flows is influenced by a huge number of factors which in the most general view can be divided on internal and external that is reflected in table 1. The factors influencing formation of cash flows External factors

Table 1

Internal factors

Environment of the commodity mar- Life cycle of the organization ket Environment of stock market Duration of an operational cycle System of the taxation of the orga- Seasonality of production and realnizations ization of goods and services Established practices of crediting of Urgency of investment programs suppliers and buyers of production System of implementation of settle- Depreciation policy of the organizament operations of economic entities tion Availability of the financial credit Coefficient of operational leverage Possibility of attraction of financial Financial mentality of owners and resources of gratuitous target finan- managers of the organization cing

1.2. Methods and indicators of the analysis of cash flows

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Money can come to the organizations from various sources. The most widespread of them are: –– income from product sales; –– the receipts mobilized in the financial market (sale of shares, bonds and other securities); –– dividends and percent on securities of other issuers; –– the venture capital (the risk investments made in new fields of activity counting on fast payback of invested funds); –– short-term and long-term credits and loans; –– income from realization of property; –– budgetary appropriations; –– insurance compensations and so forth. 1.2. Methods and indicators of the analysis of cash flows Cash flows of the organization in all forms and shapes are the most important, independent object of the analysis of its financial position. It is caused by that, first, cash flows serve carrying out economic activity of the organization; secondly, provide financial balance of the organization in the course of strategic development; thirdly, promote increase of rhythm of operational process; fourthly, allow to reduce need for the loan capital; fifthly, are a financial leverage for acceleration of a turn of the capital and, at last, allow to get additional profit. The analysis of cash flows is a definition of the moments and sizes of inflows and outflows of monetary cash. The purpose of the analysis of cash flows of the organization is the fullest and reliable providing the interested users with information on process of formation of cash flows necessary for an assessment of their balance and efficiency. Main objectives of the analysis of cash flows: –– assessment of dynamics and structure of sources of inflow and directions of outflow of money; –– an assessment of balance of negative and positive cash flows and determination of their sufficiency for payments according to short-term obligations; –– studying of structure of a pure cash flow;

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1. Theory of the analysis of cash flows

–– assessment of turnover of money; –– studying of profitability of the organization for a pure cash flow; –– an assessment of influence of factors on proceeds from sales of production which is the main source of receipt of money. Object of the analysis are all turnovers of accounts of money. The importance of such type of assets as money, according to J.M. Keynes, is defined by three main reasons: 1) conventionalism – money is used for performance of the current operations and as between the entering and proceeding cash flows always there is a time log, the organization is compelled to hold constantly free money on the settlement account; 2) precaution – activity of the organization has no rigidly predetermined character therefore money is necessary for performance of unforeseen payments; 3) resale – money is necessary for speculative reasons as constantly there is a nonzero probability of that possibility of favorable investment will unexpectedly be presented. A number of special systems and methods of the analysis of the cash flows allowing to receive a complex quantitative assessment of results of their multidimensional functioning in the organization both in a statics, and in dynamics are applied to the solution of specific objectives of analytical research. In the theory of financial management depending on the used methods distinguish the following systems of the analysis which is carried out at research of functioning of cash flows: horizontal (dynamic) analysis, vertical (structural), analysis of financial coefficients, integrated analysis. The greatest distribution was gained by the following systems of the integrated analysis: Du Pont system of the analysis, system of SWOT analysis and object-oriented analysis. Except the listed main analytical methods of the analysis of cash flows of the organization there are evidence-based receptions of the financial analysis: –– the traditional - comparison, comparison, group;

1.2. Methods and indicators of the analysis of cash flows

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–– the economic-mathematical – graphic, matrix methods, a method of linear programming, a method of the correlation and regression analysis, a method of the theory of sets, etc.; –– the heuristic – the methods based on expert estimates of experts, their intuition, last experience. In practice not one is usually used, but set of methods of the analysis. Set of the indicators characterizing cash flows can be grouped in the following blocks: 1) indicators of dynamics of cash flows; 2) indicators of quality of cash flows; 3) indicators of balance of cash flows; 4) indicators of profitability of cash flows; 5) indicators of efficiency of use of money. Indicators of the first group are determined by kinds of activity of the organization, and also by separate sources and the directions of leaving of money. Research of dynamics of a cash flow is a basis of forecasting of inflow and outflow of money for the forthcoming period. When studying dynamics of cash flows it is important to compare growth rates of positive and negative cash flows. If growth rate of inflow of money advances rate of an expense of their outflow, the pure cash flow will have a positive tendency of building, and vice versa. The pure cash flow characterizes economic effect of a circulation of all cash flows of the organization. The coefficient of a gain of a pure cash flow characterizes ability of the capital in a monetary form to provide various extent of self-increase of its cost that creates prerequisites for expansion of economic base in the subsequent periods. Indicators of the second group estimate structure of inflow, outflow of money and a pure cash flow. They characterize individual share of separate operations in formation of cash flows of the organization. Indicators of quality of a cash flow open the most important components of formation of cash flows of the organization taking into account specifics of its functioning, and also define those kinds of activity as a result of which the main inflow of money is formed.

22

1. Theory of the analysis of cash flows

Indicators of the third group open compliance of inflow and outflow of money, characterize rates of building of a pure cash flow, and also efficiency of operations on receipt and leaving of money. Carry coefficients of sufficiency of money and a covering of outflow of money which characterize ability of the organization to pay off according to obligations due to receipt of money to indicators of this group. The solvency defined for the beginning and the end of the period is considered as result of accumulation of monetary resources for performance of obligations that allows to reveal viability of the organization. The coefficients opening sufficiency of the money arriving at the expense of internal sources (proceeds from sales of goods, services, the capital and other assets) for a covering of all sum of payments also belong to indicators of this group. Such indicators allow to open abilities of the organization to pay off according to the obligations at the expense of own money. The fourth group includes profitability indicators at which calculation instead of profit the pure cash flow which is considered as one of forms of economic effect is used. Indicators of this block characterize efficiency of use of assets and own capital. If it is necessary to define profitability of realization, it is necessary to use a pure cash flow from operating activities as the income from product sales is result also the main source of receipt of funds of this kind of activity. Profitability of realization defines a share of a pure cash flow in the sum of inflow of money from product sales. Besides, indicators of profitability allow to compare rates of change of a pure cash flow with rates of change of own capital, assets, proceeds from sales of production and outflow of money. The fifth group included indicators of efficiency of use of money. For an assessment of efficiency of use of money define indicators of turnover and profitability of money. Indicators of turnover of money consider as indicators of liquidity of a cash flow which provide maintenance of constant solvency of the organization. Turnover in days characterizes the period during which money is on accounts of the organization without the movement. Such indicator allows to determine the size of the rest of money. In case of lack of the minimum

1.2. Methods and indicators of the analysis of cash flows

23

stock of money there can be financial difficulties. To the contrary, their excessive size testifies to an irrational investment and use of money. Indicators of profitability of money are defined by comparison of the rest and cash flow to the received financial result or a pure cash flow in this connection it is possible to establish profitability of the rest of money, profitability of inflow of money and profitability of outflow of money. Indicators of profitability of money characterize, what size of a pure cash flow is the share of one tenge of the money which is at the disposal (spent or received) to the organization during the studied period. These indicators calculated on a pure cash flow (net profit) need to be determined as in general by the organization, and by kinds of activity. The analysis of financial coefficients is based on calculation of a ratio of various absolute measures of economic activity of the organization among themselves. In the course of use of this system of the analysis various relative indicators characterizing separate indicators of cash flows, and extent of their influence on the general level of a financial position of the organization are defined. In a control system of cash flows the greatest distribution was received by the following groups of analytical financial coefficients: 1. The coefficients characterizing the level of liquidity of monetary streams. They characterize possibility of the organization in due time to pay off according to the financial obligations. The most important role in the course of such assessment is played by the following indicators: –– coefficient of liquidity of a cash flow: Cl.cf = CFpos / CFneg. This coefficient shows, in what degree the gross positive cash flow of the organization provides a covering of its negative cash flow. For ensuring necessary liquidity of a cash flow it has to matter not lower than 1 (excess 1 will generate growth of the rest of monetary

24

1. Theory of the analysis of cash flows

assets for the end of the considered period, that is to promote increase of coefficient of absolute solvency of the organization); –– coefficient of absolute solvency: Cas = (M + FIs-t) / Os-t. This coefficient shows, in what degree all short-term obligations of the organization are provided with the ready instruments of payment which are available for it for a certain date; –– coefficient of intermediate solvency: Cis = (M + FIs-t + Rs-t) / Os-t. It shows, in what degree all short-term obligations of the organization can be satisfied at the expense of it′s highly liquid assets; –– coefficient of the current solvency: Ccs = CFpos.oa / CFneg.oa. The coefficient characterizes sufficiency of a cash flow from operating activities. If value of coefficient of the current solvency more than 1, the organization can extinguish completely the obligations from operating activities due to excess of inflows over outflows. 2. The coefficients characterizing the level of efficiency of cash flows. They give the generalized characteristic of efficiency of formation of cash flows of the organization. The main of these indicators are: –– coefficient of security with money: Csm = 365 · (Mas / CFneg.oa). The coefficient characterizes, how many on average days the organization will be able to work without additional inflow of money. The structure of balance of the organization admits unsatisfactory, and the organization – insolvent if the coefficient of security with money for the end of the reporting period matters less than 0,1;

1.2. Methods and indicators of the analysis of cash flows

25

–– coefficient of sufficiency of a pure cash flow: Cs.cf.pur = CFpur / (PPCLl.s-t + ΔGSIIap.s-t + Dpo). If value of coefficient of sufficiency of a pure cash flow is more or equally 1, it means that the pure cash flow of the current period was sufficient for increase in cost of long-term assets and payment of dividends; –– coefficient of efficiency of a pure cash flow: Ce.cf.pur = CFpur / CFneg; –– coefficient of profitability of a positive cash flow: Cp.cf.pos = NP / CFpos. The coefficient characterizes a share of net profit in the total amount of monetary receipts of the organization. The value of an indicator is higher, the economic activity of the organization is more effective; –– coefficient of profitability of a negative cash flow: Cp.cf.neg = NP / CFneg. The coefficient shows the sum of the net profit falling on tenge of the cash expenditures incurred by the organization; –– coefficient of profitability of average size of money: Cp.m.as = NP / Mas. The coefficient shows the size of the net profit got by the organization from each tenge of the available rest of money; –– coefficient of profitability of a pure cash flow: Cp.cf.pur = NP / CFpur;

26

1. Theory of the analysis of cash flows

–– coefficient of turnover of average size of money: Ct.m.as = P / Mas. The coefficient of turnover of money shows duration of one turn of money. The lower, the more effective money is wrapped, the turnover cycle of money is shorter. It is expedient to analyze the transferred coefficients in dynamics. 1.3. Receptions and analysis stages of cash flows The analysis of cash flows is carried out on the organization in general, on main types of its activity, on separate structural divisions. For this purpose dynamics of volume of a positive cash flow of the organization for separate sources is considered. Thus rates of a gain of a positive cash flow are compared with rates of a gain of outputs and product sales. The special attention is paid to studying of a ratio of attraction of money at the expense of internal and external sources, to identification of degree of dependence of development of the organization on external sources of financing. To open real cash flow in the organization, to estimate synchronism of receipts and payments, and also to coordinate the size of the received financial result to a condition of money, it is necessary to allocate and about to analyze all directions of receipt, and also their leaving. The directions of cash flow in all sources, as a rule, can be considered in a section of primary activities – operational, investment and financial. Division of all activity of the organization into three independent spheres very important in practice as good (that is close to zero) the cumulative stream can be received for the account of elimination or compensation of a negative cash flow from operating activities by inflow of means from realization of assets (investment activity) or attraction of the credits of bank (financial activity). In this case the size of a cumulative stream masks real unprofitability of the organization. The greatest distribution in modern analytical literature was gained by tools which give the chance to establish sources and the

1.3. Receptions and analysis stages of cash flows

27

directions of use of money, and also to define reasons for rejection of the rest of the money from pure financial result received by the organization for the reporting period of time. To receive the answer to a question of sources and the directions of use of money «��������������������������������������������������� ���������������������������������������������������� Receipt of money for the studied period������������ »����������� and «Leaving of money for the studied period» is possible by specification of indicators». At formalization of interrelation between the called indicators and their composed the data provided by the report on cash flow are considered. Basic formulas for carrying out research of sources of receipts and the directions of use of money have an appearance: n

Mar = ∑ARm.i ; i=1 n

Msp = ∑AEm.i , i=1

In the analysis of sources and the directions of use of money their structure is established, dynamics of volume of the arrived and used money in general and in a section of each composed is considered. For an assessment of dynamics the absolute deviation, growth rate and rate of a gain is defined. At the same time the specific weight of each source and the direction of use in the total amount of the arrived and used money, for the purpose of identification more essential and considerably the cash flows which affected volume pays off. Indicators of sources and the directions of use of funds of the organization reflect the factors which are directly defining a closing balance and a net balance of these means. A net balance of money for the period – an indicator in number equal to the size of a pure cash flow or difference of receipt and leaving of money, or a difference of the remains of money for the beginning and the end of the period: Mn.b = Mend - Mbeg = CFpur. Interrelations of cash flows of the organization with the remains of money have the following appearance:

28

1. Theory of the analysis of cash flows



n

n

Mend = Mbeg + ∑ARm.i - ∑AEm.i;



i = 1



i=1

n n

Mn.b = ∑ARm.i - ∑AEm.ii.



i = 1

i=1

The cash flows connected with changes of short-term assets are defined as a difference of data of the aggregated balance on the previous and current intervals of the analysis. Thus, As-t = As-t.n-1 - As-t.n. Calculation of the cash flows connected with change of shortterm assets is made on each of their elements. The element of short-term assets considered separately is money. The change of size of free money calculated on the basis of data of balance carries the name of the actual cash flow. This size shows, on how many the sum of the money which is at the disposal of the organization increased in this period of the analysis (or I decreased). Calculation of this indicator is made according to the aggregated balance on the following formula: Мa = Mn - Mn-1. For complex research of the factors rendering on monetary streams of the organization and consequently on the final and pure remains of money direct and indirect influence it is necessary to use formulas:



n n m

p

Mend = Mbeg + ∑ARm.i - ∑AEm.i + ∑PFRr · RIT - ∑ PFRi · RIT; i = 1

i = 1

k = 1

n n m

t=1

p

Mn.b = ∑ARm.i - ∑AEm.i + ∑PFRr · RIT - ∑PFRi · RIT. i = 1

i = 1

k = 1

t=1

1.3. Receptions and analysis stages of cash flows

29

As cash flows are characterized by essential unevenness of receipts and payments of money in a section of separate time intervals in the studied period, the assessment not simply of a ratio of the arrived and spent money, and their movement on certain periods of time is actual. However determination of balance of inflow and outflow of money on volume and on time within the subsequent analysis with use only of reporting information is impossible. Attraction of information containing in registers of accounting and economic and legal documents is required. During the analysis it is necessary to count indicators of structure of receipts and payments on kinds of activity, and also dynamics indicators (rates of a gain) of receipts and payments. Estimating pure cash flows on kinds of activity it must be kept in mind the following: –– the pure cash flow from operating activities has to be positive. The positive cash flow from operating activities is an evidence of successful activity of the organization and possibility of further development at the expense of own means; –– the pure cash flow from investment activity has to be negative (i.e. payments have to exceed receipts; as investment activity is connected with acquisition and realization of long-term assets), it testifies that considerable investments into longterm assets are carried out and probably capacities of the organization extend; –– the pure cash flow from financial activity has to be positive (as this activity is connected with change of own invested capital and borrowed funds). It testifies that the organization finances the extending activity by external sources. The analysis of cash flow gives the chance to draw more valid conclusions on that: –– in what volume and from what sources the money and what main directions of their use which came to the organizations were received; –– whether the organization for the short-term obligations is capable to answer;

30

1. Theory of the analysis of cash flows

–– whether enough own means of the organization for implementation of investment activity; –– than divergences of size of the got profit and existence of money, etc. speak. The analysis of cash flows is carried out in general on the organization, and also in a section of main types of its activity, on separate structural divisions («the centers of responsibility») for the following stages. At the first analysis stage dynamics of total amount of a monetary turn of the organization is investigated. In the course of this aspect of the analysis rates of a gain of total amount of a monetary turn are compared with rates of increments of assets of the organization, outputs and realization of goods and services. For an assessment of level of generation of cash flows in the course of economic activity of the organization the indicator of specific volume of a monetary turn on unit of the used assets is used. Increase of this indicator in dynamics testifies to an intensification of generation of cash flows of the organization in the course of implementation of its economic activity and vice versa. At this stage of the analysis the special attention has to be paid to consideration of dynamics of total amount of a monetary turn from operating activities of the organization. The indicator of specific volume of a monetary turn of the organization on unit of the realized production can be for this purpose used. At interpretation of dynamics of this indicator it is necessary to consider that the volume of product sales makes a primary share of the sum of a gross positive cash flow from operating activities. Therefore, increase of specific volume of a monetary turn is defined on unit of the realized production with other things being equal by increase of the sum of a gross negative cash flow, that is growth of costs of production and product sales that is characterized as a negative tendency. At last, at this stage of the analysis it is necessary to compare rates of dynamics of duration of a monetary turn from operating activities in days with rates of dynamics of a cycle of a monetary turn (a financial cycle) of the organization.

1.3. Receptions and analysis stages of cash flows

31

At the second analysis stage dynamics of volume and structure of formation of a positive cash flow (receipt of money) of the organization in a section of separate sources is considered. The main attention at this stage of the analysis is paid to studying of sources of money by types of financial and economic activity of the organization. As the main generator of a positive cash flow are operating activities, as an important indicator of an assessment the coefficient of participation of operating activities in formation of this stream acts. In the course of research of dynamics of volume and structure of formation of a positive stream from operating activities of the organization the main attention has to be paid to a ratio of sources of money from product sales and other types of operating activities. When studying dynamics of volume and structure of a positive cash flow from investment activity the main attention should be paid to receipt of the income from long-term financial instruments of investment, comparing the level of this income with average standard of the income in the capital market. Investigating dynamics of volume and structure of a positive cash flow from financial activity, the main attention has to be paid to a ratio of the loan and own capital attracted from external sources. The structure of the raised loan money in the course of the analysis has to be differentiated in a section of the short and long-term credits and loans. At the third analysis stage dynamics of volume and structure of a negative cash flow (an expenditure of money) of the organization for the certain directions of expenses of money is considered. In the course of this stage of the analysis first of all is defined, these expenses on main types of financial and economic activity of the organization how were in proportion distributed, they had regular or extreme character, in what measure they were objectively caused. As in ensuring development of the organization the greatest role is played by investment expenses, as an important indicator of an assessment the coefficient of participation of investment activity in formation of a negative cash flow acts. In the course of research of dynamics of volume and structure of formation of a negative cash flow from operating activities of

32

1. Theory of the analysis of cash flows

the organization the main attention has to be paid to a ratio of an expenditure of money on production and realization of goods and services, on the one hand, and other types of operating activities, with another. The first type of expenses has to be subjected then to the itemized analysis of expenses. By consideration of dynamics of volume and structure of formation of a negative cash flow from investment activity of the organization it is necessary to define how in proportion the separate types of assets providing a gain of its market value developed at the expense of an expenditure of this money; in what proportions investment expenses were connected with real and financial investment; in what volumes implementation of separate investment projects was financed. Analyzing dynamics of volume and structure of formation of a negative cash flow from financial activity, the main attention should be paid to timeliness of repayment of the sums of a principal debt on earlier attracted loans and loans, and also for volumes of payments and timeliness of calculations for dividends (percent). At the fourth analysis stage balance of positive and negative cash flows on the organization in general is considered. In the course of this analysis the equation of balance model of a cash flow of the organization which has the following appearance is used: The sum of monetary assets for the beginning of the considered period + The total amount of a positive cash flow in the considered period = The total amount of a negative cash flow in the considered period + The sum of monetary assets for the end of the considered period. Apparently from this equation, as the indicator of the imbalance of separate types of cash flows generating deterioration of a financial position of the organization for the level of its solvency reduction of the sum of monetary assets by the end of the considered period acts (in comparison with their sum for the beginning of the period). At the fifth analysis stage dynamics of formation of the sum of a pure cash flow as most important indicator of an assessment of productivity of all financial management aimed at providing growth of market value of the organization is considered.

1.3. Receptions and analysis stages of cash flows

33

In the course of this analysis it is featured «quality of a pure cash flow» - the generalized characteristic of structure of sources of its formation. High quality of a pure cash flow is characterized by growth of specific weight of the net profit got at the expense of increase in volume of production and decrease in their prime cost, and low - at the expense of increase in a share of the net profit connected with implementation of non-operating operations, realization of long-term assets, etc. For elimination of influence of economic cycles, calculation of coefficient of sufficiency of a pure cash flow of the organization is recommended to be made in three last years (but not less than for full business year). At the sixth analysis stage uniformity of formation of cash flows of the organization for separate intervals of the considered time period is investigated. Considering that unevenness of formation of cash flows of the organization in time generates a number of serious commercial, financial and investment risks or is their reflection, the sizes of time intervals in the course of research have to be minimum and not exceed one month. Objects of the analysis of uniformity of cash flows of the organization first of all have to be: –– total amount of a monetary turn; –– total amount of a positive cash flow; –– total amount of a negative cash flow; –– the sum of the positive cash flow connected with product sales; –– the sum of the negative cash flow connected with real investment; –– total amount of a pure cash flow; –– the sum of the net profit got from product sales. For calculation of degree of uniformity of formation of cash flows of the organization for separate intervals of time indicators of a mean square (standard) deviation and coefficient of a variation are used. At the seventh analysis stage synchronism of formation of positive and negative cash flows in a section of separate intervals of the considered time period is investigated. Need of such research is dictated to that in the conditions of high unevenness of formation of

34

1. Theory of the analysis of cash flows

different types of cash flows in a section of separate time intervals in the organization considerable volumes of temporarily free monetary assets or their temporary deficiency are formed. Results of the analysis are used for identification of reserves of optimization of cash flows of the organization and their planning and control for the forthcoming period. Control questions 1. What interpretations of the term «cash flow» have distribution in economic literature? 2. In what the sense the concept «pure cash flow» consists? 3. How cash flows are classified by service scales? 4. How cash flows are classified by kinds of activity? 5. What represent cash flows from operating, investment and financial activities? 6. In what a role of a cash flow in economic activity of the organization? 7. What factors influence formation of cash flows? 8. What main sources of receipt of money in the organization? 9. In what the purpose and tasks of the analysis of cash flows? 10. What main methods are used in the analysis of cash flows? 11. In what essence of traditional, economic-mathematical and heuristic methods of the analysis of cash flows? 12. In what essence of indicators of dynamics of cash flows? 13. In what essence of indicators of quality of cash flows? 14. How indicators of profitability of cash flows are defined? 15. What indicators are used for an assessment of efficiency of cash flows? 16. How the coefficient of liquidity of cash flows pays off? 17. How the effectiveness ratio of cash flows pays off? 18. How cash flows of the organization from the remains of money are interconnected? 19. On what stages the analysis of cash flows is carried out? 20. In what the analysis of dynamics of total amount of a monetary turn of the organization consists?

1.3. Receptions and analysis stages of cash flows

35

Tests 1. As a pure cash flow it is understood: a) net – result of the movement of positive and negative money as a result of implementation of operations of the organization; b) inflow of money in the form of the sales proceeds received for the period; c) a difference between inflow of money in the form of the received sales proceeds and outflow of money for the period. 2. The cash flow from operating activities includes: a) receipts from product sales and payments to suppliers; b) purchase and realization of fixed assets; c) share issue and payment of dividends. 3. In the report on cash flow of the organization it is developed the sums of receipts and expenses which arose throughout the reporting period as a result are given: a) operating, financial and investment activities; b) production реализационной activity; c) innovative, investment and financial activity; d) operating, investment, financial and innovative activities. 4. Receipt of money from product sales belongs to: a) investment activity; b) operating activities; c) financial activity; d) all answers are right. 5. The entering cash flow represents: a) the size of receipts of money for the reporting period; b) pure inflow of money for the reporting period; c) the size of an expenditure of money for the reporting period; d) net cash outflow for the reporting period. 6. The proceeding cash flow represents: a) the size of receipts of money for the reporting period; b) pure inflow of money for the reporting period; c) the size of an expenditure of money for the reporting period; d) net cash outflow for the reporting period.

36

1. Theory of the analysis of cash flows

7. Leaving of means owing to acquisition of fixed assets and other long-term assets belongs to: a) investment activity; b) operating activities; c) financial activity; c) all answers are right. 8. Receipt of money from sale of shares and parts in own capital belongs to: a) investment activity; b) operating activities; c) financial activity; d) all answers are right. 9. Cash flow as a result of financial activity is: a) the obtained loans; b) other payments; c) repayment of loans; d) receipt of own capital; e) payment of dividends. 10. Cash flow as a result of investment activity is: a) receiving percent; b) realization of financial investments; c) receipt (receiving) of dividends; d) acquisition of long-term assets; e) all correct answers. 11. Cash flow from operating activities is: a) change (increase or reduction) short-term obligations; b) payment of percent; c) payment of income tax; d) receipt of money from buyers; e) transfer of money to suppliers. 12. Receipts of sales proceeds belong to: a) financial activity; b) operating activities; c) investment activity.

1.3. Receptions and analysis stages of cash flows

37

13. Outflow of money upon purchase of fixed assets belongs to the following kind of activity: a) the financial; b) the operational; c) the investment. 14. For an assessment of a pure cash flow of the organization use data: a) balance sheet; b) profit and loss report; c) report on cash flow.

38

2. Methods of an assessment of cash flows

2. METHODS OF AN ASSESSMENT OF CASH FLOWS

2.1. Direct method of an assessment of cash flows The direct method of an assessment of cash flows is based on disclosure of main types of gross monetary receipts and gross monetary payments, i.e. an initial element are the sales proceeds. The direct method has available procedure of calculation which is clear to domestic accountants and analysts. It is directly connected with registers of accounting, is convenient for calculation of indicators and control of receipt and an expenditure of money. In the long term the direct method of an assessment of cash flows gives the chance to estimate the level of liquidity of the organization. In operational management of finance the direct method can be used for control of process of formation of proceeds from sales of production and conclusions concerning sufficiency of money for payments according to financial obligations. The technique of an assessment of cash flows by a direct method is rather simple as is based directly on the report about cash flow. She allows to study: –– to the loudspeaker of cash flows (the cash flow is reflected in a form 3 in two years – reporting and previous); –– structure and structure of cash flows in a section of kinds of activity, sources and the directions of use of money; –– structure and structure of a pure cash flow on kinds of activity. Besides, on the basis of this form it is possible to judge liquidity of the organization, i.e. sufficiency of means for payments according to short-term obligations, and also implementation of investment activity as in details opens cash flow on accounts of the organization. Methodical basis of a direct method of an assessment of cash flows is the balance method which features is the following: –– doesn’t consider the temporary value of money; 38

2.1. Direct method of an assessment of cash flows

39

–– calculation of the rest of money is conducted on the basis of expression: Mbeg + CFpos - CFneg = Mend. The direct method is directed on data acquisition, characterizing both a gross, and pure cash flow of the organization in the reporting period. It is urged to reflect all volume of receipt and an expenditure of money in a section of separate kinds of activity and on the organization in general, is convenient for calculation of indicators of control of receipt and an expenditure of money. Thus excess of receipts over payments both on the organization in general, and on kinds of activity means inflow of money, and excess of payments over receipts – their outflow. Considering indicators of cash flows on kinds of activity, it should be noted that the greatest volume of money supply is provided by operating activities of the organization. Positive dynamics of a pure cash flow from operating activities characterizes scales of growth of financial capacity of the organization. From operating activities the pure cash flow is defined by a direct method as follows: Pure cash flow from operating activities Positive cash flow Revenue from production

Negative cash flow Payment of production

Advance payments from buyers and customers

Salary and assignments

Other receipts

Taxes and fees The short-term the financial investments Percent on to the credits Other payments

According to the principles of the international account the organization chooses a method of calculation of cash flows independently, however preferable it is considered the direct method allowing to gain a better understanding about their volume and structure. The basic formula on which calculation of the sum of a pure cash flow from operating activities of the organization is made by a direct method, has the fol-

40

Advance payments from buyers and customers

Salary and assignments

Other receipts

Taxes and fees The short-term

2. Methods of an assessment of cash flows the financial

investments According to the principles of the international account the organization chooses a method of calculation Percent on of cash flows to the credits independently, however preferable it is considered the direct method allowing to gain a better understandingOther about their payments volume and structure. The basic formula on which calculation of the sum of a pure cash flow from operating activities of the organization is made by a According to the principles of the international account the organization chooses a directofmethod, hasofthe following appearance:however preferable it is consimethod calculation cash flows independently,

dered the direct method allowing to gain a better understanding about their volume and structure. The basic which cash . flow CFpur.oa =M +formula Mor.oa - on Mpa.ii - SPcalculation - SPa-m.pof- the TPbsum - TPofo-b.fa -pure Mop.oa p.s o.p from operating activities of the organization is made by a direct method, has the following appearance: Below the order of an assessment of cash flows is shown by a CFpur.oa = Mp.s + Mor.oa - Mpa.ii - SPo.p - SPa-m.p - TPb - TPo-b.f - Mop.oa, direct method: Below the order of an assessment of cash flows is shown by a direct method: Monetary receipts from buyers

Monetary payments - to suppliers and workers

Money Payment Pure cash flow from operating of percent from operating = activities - and taxes = activities

The algorithm of recalculation by a direct be preThe algorithm of recalculation by a direct method can bemethod presentedcan as follows: 1) the monetary revenue is equal to proceeds from sales of production (profit and sented as follows: loss report) plus monetary reduction ofrevenue receivables or minus in from receivables 1) the is equal to increase proceeds sales(balance); of pro2) expenses are equal in a monetary form to prime cost of the realized production duction (profit and loss report) plus reduction of receivables or minus (profit and loss report) plus increase in the remains of stocks or minus reduction of receivables the increase remains ofinstocks (balance)(balance); and plus reduction of receivables or minus increase in 2) expenses are equal in a monetary form to prime cost of the realreceivables; ized production (profit and loss report) plus increase in the remains of 29 stocks or minus reduction of the remains of stocks (balance) and plus reduction of receivables or minus increase in receivables; 3) other expenses are equal to expenses from operating activities (profit and loss report) in a monetary form plus expenses or minus reduction of expenses (balance) and plus reduction of other receivables or minus increase in other receivables; 4) wear is equal in a monetary form to zero (the added wear minus the added wear); 5) other payments are equal in a monetary form plus reduction of accounts payable or minus increase in accounts payable;

41

2.1. Direct method of an assessment of cash flows

6) net – cash flow from operating activities is equal: item 1 – item 2 – item 3 – item 4 – item 5. The direct method of an assessment of cash flows provides reflection of the full sums of the money which arrived from buyers and paid to suppliers through the settlement account, cash desk or money equivalents. By drawing up the report on cash flow need to classify each economic operation at reference it by sight activity arises by a direct method. Existence of a large number of such operations demands serious labor expenses by drawing up the report. Other complexity by drawing up the report on cash flow by a direct method is need of «cleaning out��������������������������������������������������������� »�������������������������������������������������������� (elimination) of internal turns (for example, an exception of movements of cash between the settlement account and cash desk, between different types of bank accounts of the organization, etc.). Otherwise it will lead to distortion of the reporting by unreasonable increase in cash flows. To estimate all directions of receipt (inflows) and leavings (outflows) of funds of the organization by a direct method it is possible to make by means of table 2. Scheme of cash flow (direct method) Indicators 1 I. Cash flow from operating activities 1. Receipt of money: – product sales – other revenue – the advance payments received from buyers, customers – receipts under contracts of insurance – the earned rewards – other receipts 2. Leaving of money: – payments to suppliers for production

Table 2

The positive The negative cash flow cash flow 2 3  

х х х х х х х

42

2. Methods of an assessment of cash flows

1 – the advance payments issued to suppliers of products – payments for compensation – remuneration payment – payments under contracts of insurance – income tax and other payments in the budget – other payments 3. A pure cash flow from operating activities II. Cash flow from investment activity 1. Receipt of money: – realization of fixed assets – realization of intangible assets – realization of other long-term assets – realization of share tools of other organizations and shares in joint business – realization of debt tools of other organizations – compensation at loss of control over the affiliated organizations – realization of other financial assets

2

– future and forward contracts, options and swaps – the received dividends – the earned rewards – other receipts 2. Leaving of money: – acquisition of fixed assets – acquisition of intangible assets – acquisition of other long-term assets – acquisition of share tools of other organizations (except affiliated) and share in joint business

х

– acquisition of debt tools of other organizations

3 х х

х х х х х

х

х х х х х х х

х х х х х х х

43

2.1. Direct method of an assessment of cash flows

1 – acquisition of control over the affiliated organizations – acquisition of other financial assets – granting loans – future and forward contracts, options and swaps – investments into the associated and affiliated organizations – other payments 3. A pure cash flow from investment activity III. Cash flow from financial activity 1. Receipt of money: – issue of shares and other financial instruments – receiving loans – the earned rewards – other receipts 2. Leaving of money: – repayment of loans – remuneration payment – payment of dividends – payments to owners for stocks of the organization – other leavings 3. A pure cash flow from financial activity 4. A pure cash flow on all kinds of activity

2

3

х х х

х

х х

х х х х

х х

х х х х х х х х

It is necessary to remember that the cumulative cash flow has to be equal to a difference of initial and final balance of money for the period. Lack of a direct method is that it doesn’t open interrelation of the received financial result and change of the absolute size of funds of the organization. Besides, this method demands big expenses of time, than other methods of an assessment of a cash flow, and the reporting received with its use is less useful.

44

2. Methods of an assessment of cash flows

We will consider on an example preparation of the report on cash flow by a direct method. Basic data: As basic data additional data, necessary for drawing up the report, according to accounting of the organization are submitted the balance sheet of the organization 1 for December 31, 2013 (tab. 3) and the profit and loss report for 2013 (tab. 4), and also. Table 3

Balance sheet

(million tenges) Indicators Money Short-term receivables Stocks Deferred expenses Total short-term assets Fixed assets Total long-term assets Total assets Short-term accounts payable Percent to payment Current tax obligations Total short-term obligations Bonds for payment Total long-term obligations Total obligations Common stocks Retained earnings Total capital Total obligations and capital

2012 48 160 280 16 504 648 648 1152 160 16 48 224 256 256 480 320 352 672 1152

2013 68 240 336 24 668 760 760 1428 140 12 88 240 360 360 600 380 448 828 1428

20 80 56 8

Dynamics Increase Increase Increase Increase

112

Increase

20 4 40

Reduction Reduction Increase

104

Increase

60 96

Increase Increase

2.1. Direct method of an assessment of cash flows

The profit and loss report for 2013 Indicators Proceeds from sales of production Cost of sales Salary and other operating expenses

Sum, one million tenges 2360 (1200) (864)

Expenses on percent Expenses on taxes Expenses on depreciation Loss from realization of fixed assets Profit on redemption of stocks Net profit

(28) (60) (96) (24) 64 152

45

Table 4

According to this reporting we have the following data: –– short-term receivables were formed in connection with sale of the material and production stocks (MPS), and creditor – in connection with purchase of MPS. Thus in 2013 it is bought objects of fixed assets for the sum of 280 million tenges, and 10 million tenges were paid by cash, for other sum bonds are issued; –– fixed assets for 48 million tenges, a loss from realization of production – 24 million tenges are sold; –– money from issue of bonds of 60 million tenges is received; –– at repayment of bonds with a balance cost of 136 million tenges income in 64 million tenges because of payment of only 7218 million tenges for them is gained; –– payment of dividends made 56 million tenges. Dividends belong to financial activity. When using a direct method the sums of receipt and a funds expenditure according to accounting of the organization are transferred to the report. For calculation by a direct method we can make the report by updating of articles of the profit and loss report, since revenue, then prime cost, etc.: 1. Correction of proceeds from sales of production for the sum of short-term receivables. The revenue is corrected on increase in short-

46

2. Methods of an assessment of cash flows

term receivables (with minus) or reduction of short-term receivables (with plus). The increase (reduction) for the reporting period of all articles of balance is presented in table 26. We will take a line of balance «Short-term receivables» and we will look at its change. There was an increase in short-term receivables for the period. Then: Cash flow = Revenue of product sales - Increase in short-term receivables (+ Reduction of short-term receivables) = 2360 - 80 = =2280 million tenges. 2. Correction of prime cost on short-term accounts payable and stocks. Prime cost is corrected on increase in stocks (with plus), reduction of stocks (with minus), increase in short-term accounts payable (with minus) or reduction of short-term accounts payable (with plus). An order of adjustments the same, as for revenue. We take prime cost from the profit and loss report and we correct it on change of stocks and short-term accounts payable: Cash flow = Prime cost + Increase in stocks - Increase in shortterm accounts payable (-Reduction of stocks + Reduction of shortterm accounts payable) = 1200 + 56 + 20 = 1276 million tenges. 3. Expenses on percent are corrected on debt on percent. Expenses on percent from the profit and loss report are corrected on change of debt on percent from balance: Cash flow = Expenses on percent - Increase in debt (+ Reduction of debt) = 28 + 4 = 32 million tenges. 4. Expenses on taxes are corrected on debt on taxes. Expenses on taxes from the profit and loss report are corrected on change of debt on taxes from balance: Cash flow = Expenses on taxes - Increase in debt (+ Reduction of debt) = 60 - 40 = 20 million tenges. 5. Operating expenses are corrected on change of expenses of future periods and the other added expenses (reserves): Cash flow = Operating expenses + Increase in expenses of future periods – Increase in the added expenses (-Reduction of expenses of future periods + Reduction of the added expenses) = 864 + 8 = = 872 million tenges.

2.1. Direct method of an assessment of cash flows

47

Thus, revealed all cash flows and we can make the report regarding operating activities. Operations on purchase and sale of fixed assets belong to the section ���������������������������������������� «��������������������������������������� Money from Investment Activity��������� »�������� . Therefore we include all data which we have on this operation in the report on cash flow. In this case it is proceeds from sales of fixed assets of 60 million tenges and purchase of fixed assets for 40 million tenges. Operations belong to financial activity: –– issue of bonds – 60 million tenges; –– payment for bonds – 72 million tenges; –– the dividends paid – 70 million tenges. And for the beginning of the period we take balance of money for the end of the period from balance. As a result the report will look as follows (tab. 5). Table 5

Report on cash flow (direct method) Indicators 1 Money from operating activities: – received from product sales – spent for purchase of stocks – spent for payment of percent – spent for payment of taxes – operating expenses Pure cash flow from operating activities Money from investment activity: – received from realization of fixed assets – spent for purchase of fixed assets Pure cash flow from investment activity Money from financial activity: – received from issue of bonds – paid on bonds – the paid dividends

Sum, million tenges 2 2280 (1276) (32) (20) (872) 80 48 (40) 8 60 72 56

48

2. Methods of an assessment of cash flows

1 Pure cash flow from financial activity

2 (68)

In total increase (reduction) in money

20

Balance of money for the beginning of the period Balance of money for the end of the period

48 68

2.2. Indirect method of an assessment of cash flows The indirect method of an assessment of cash flows is based on identification and the accounting of the operations connected with cash flow of the organization and consecutive correction of net profit, that is an initial element is the profit. The essence of an indirect method consists in transformation of size of net profit to the size of money. Thus recognize that in activity of each organization there are types of expenses and the income, separate, quite often considerable in size, which reduce (increase) profit, without mentioning the size of its money. In the course of the analysis for the sum of the specified expenses (income) make adjustment of size of net profit so that the items of expenditure which aren’t connected with outflow of means, and articles of the income which aren’t followed by their inflow didn’t influence the size of net profit. Advantage of an indirect method when using in operational management is that it allows to establish compliance between financial result and own current assets. In the long term the indirect method allows to reveal the most problem «congestion places» of the frozen money and, proceeding from it, to develop ways of an exit from current situation. The indirect method is directed on data acquisition, characterizing a pure cash flow of the organization in the reporting period. It joins the receipts of money received as a result of calculations from reporting balance, the profit and loss report. Only some cash flows are shown on the actual volume: depreciation charges; receipts from

2.2. Indirect method of an assessment of cash flows

49

implementation of own stocks, bonds, receiving and payment of dividends, receiving and repayment of the credits and loans, capital investments in fixed assets, intangible assets, financial investments, a gain of current assets; sale of fixed assets, intangible assets, securities. Information sources for development of the reporting on cash flow of the organization by this method are a form 1 «Balance sheet» and the «Profit and loss report» form 2. For carrying out calculations it is necessary to use data of the turnover sheet on accounts of accounting, and also separate analytical records. At the heart of calculations – net profit, depreciation charges, and also changes of sizes of assets and liabilities of the organization. Inflows of money according to an indirect method of the analysis can be caused by increase in articles of a passive of balance and reduction of assets of balance. Outflows, on the contrary are caused by increase in assets and reduction of articles of a passive. Calculation of a pure cash flow by an indirect method is made on kinds of activity and the organization in general, by the corresponding correction of net profit for the sum of changes in stocks, receivables, accounts payable, the short-term financial investments and other assets relating to operating activities. This method allows to coordinate different types of activity and to establish a ratio between net profit and changes in assets and liabilities of balance of the organization in the reporting period. In a general view the formula for calculation and an assessment of cash flow can be written down as follows: CFpur = NP + DFA + ΔAR + ΔMS + ΔAP. To establish, with what activity (operational, investment or financial) cash flow is connected, it is possible to use the following interrelations between articles of balance and kinds of activity of the organization. On operating activities of calculation of a pure cash flow of the organization by Basic Element as an indirect method its net profit got

50

2. Methods of an assessment of cash flows

in the reporting period acts. By introduction of amendments the net profit will be transformed then to an indicator of a pure cash flow. A pure cash flow from operating activities in the considered period it is possible to calculate on a formula: CFpur.oa = NP + DFA - ΔMS - ΔAR + ΔFIs-t + ΔAP. Thus, the indirect method demonstrates distinction between pure financial result and a pure cash flow of the organization. By means of a number of adjustment procedures the financial result of the organization (net profit or a loss) will be transformed to the size of a pure cash flow from operating activities. The factors promoting increase and reduction of a pure cash flow are at the same time visible. After that study the reasons of change of each component of a pure cash flow in more detail. The sum of a pure cash flow is determined by investment activity as a difference between the sum of realization of separate types of long-term assets and the sum of their acquisition in the reporting period. Calculation of outflow of an indicator for investment activity is made on a formula: CFpur.ia = ΔFA - ΔIA - ΔICI - ΔFIl-t - ΔOAl-t. Each component of this formula can promote increase and reduction of a cash flow. In the profound analysis factors of change main composed a pure cash flow from investment activity are in more detail studied. The sum of a pure cash flow is determined by financial activity as a difference between the sum of the financial resources attracted from external sources and the sum of a principal debt, and also dividends (percent) paid to owners of the organization. A formula on which calculation of this indicator for financial activity is made: CFpur.fa = ΔOC + ΔCLl-t + ΔCLs-t.

2.2. Indirect method of an assessment of cash flows

51

The sum of cash flows on the specified three activities of the organization forms a pure cash flow. The size of a pure cash flow can be considered as potential amount of money which the organization for results of the activity has to have: CFpur = CFpur.oa + CFpur.ia + CFpur.fa. Further it is expedient about to analyze factors of change of profit, such as: the expenses included in product cost; changes of volumes of realization on credit; charge of taxes, etc. The reporting profit is corrected and at a size of the amendments which aren’t reflecting cash flow such as: depreciation of fixed assets and intangible assets; loss from realization of fixed assets and intangible assets; profit on realization of fixed assets; costs of research and developmental works. For coordination of changes of profit, working capital and money it is necessary to execute some predesigns. The first calculation – determination of volumes of purchases of materials for the reporting period: PM = CSap + ΔAP. The second calculation – determination of the sum of the material inputs included in product cost: MS = PM – ΔMS. The third calculation – determination of the sum of monetary receipts from debtors: Mrd = P – ΔAR. When using an indirect method the net profit or a loss of the organization are corrected taking into account results of operations of non-monetary character, and also changes which happened in operational working capital. Thus, this method:

52

2. Methods of an assessment of cash flows

–– shows interrelations between different types of activity of the organization; –– establishes dependence between net profit and changes in working capital of the organization for the reporting period. Below the order of an assessment of cash flows is shown by an indirect method: Earnings before tax +

Adjustments on non-monetary operations = of investment and financial character

Operating profit before change + of working capital

Changes of working capital

Pure cash flow from operating = activities

The indirect methodmethod of an assessment of cash flows is realized corrections The indirect of an assessment of cash flows isonrealized on of net profit of the reporting period as a result of which the last becomes equal to a pure corrections of net profit of the reporting period as a result of which the cash flow (a gain of the rest of money). Such adjustments are conditionally subdilastinto becomes equal a pure cash flow (a gain of the rest of money). vided three groups onto nature of economic operation; Such adjustmentsconnected are conditionally subdivided into three groups on 1) the adjustments with discrepancy of time of reflection of the income andnature expenses accountingoperation; with inflows and outflows of money on these operations; of ineconomic 2) the1)adjustments connected connected with the economic which the adjustments with operations discrepancy ofdon't timehave ofdirect impact on formation of profit, not causing cash flow; reflection of the income and expenses in accounting with inflows and 3) the adjustments connected with the operations having direct impact on calculaof money on but these tionoutflows of an indicator of profit, notoperations; defiant cash flows. the adjustments with economic operations In the2)methodical purposesconnected it is possible to the allocate a certain sequence which of implementation of such adjustments. don’t have direct impact on formation of profit, not causing cash flow; At the3)first influence on pure financial of operationshaving of non-monetary thestage adjustments connected withresult the operations direct character is eliminated. For example, leaving of objects of fixed assets and intangible impact on calculation of an indicator of profit, but not defiant cash assets causes a registration loss at a rate of their residual cost. It is quite clear that no flows. impact at a size of funds of operation of write-off from balance of residual cost of the methodical is possible allocate certain property In is made as the related purposes outflow of itmeans happenedtomuch earliera- at the time of its acquisition. Therefore, the lossof sum at aadjustments. rate of not completely depreciation cost sequence of implementation such has to beAt added thestage size ofinfluence net profit.on pure financial result of operations of the to first At the second stage adjustment procedures are carried out taking into account non-monetary character is eliminated. For example, leaving of objects changes in articles of short-term assets and short-term obligations. The purpose of of fixed assets and intangible assets causes a registration at aofrate carrying out adjustments consists in showing, at the expense of what loss articles shorttheirand residual cost.obligations It is quitethere clearwas that no impact a size of funds termofassets short-term a change of theatsum of money at the endof of operation the reportingofperiod in comparison with itsof beginning. increase in articles write-off from balance residualThe cost of property of short-term assets characterized of means and, therefore, is regarded is made as the is related outflowbyofuse means happened much earlier – at as outflow of money. Reduction of articles of short-term assets is characterized by release of means and regarded as inflow of money. Corrections of net profit or loss are made for elimination of divergences in formation of pure financial result and a pure cash flow taking into account: - changes in stocks, receivables, short-term financial investments, short-term obligations, excepting loans and the credits, during the period;

2.2. Indirect method of an assessment of cash flows

53

the time of its acquisition. Therefore, the loss sum at a rate of not completely depreciation cost has to be added to the size of net profit. At the second stage adjustment procedures are carried out taking into account changes in articles of short-term assets and short-term obligations. The purpose of carrying out adjustments consists in showing, at the expense of what articles of short-term assets and shortterm obligations there was a change of the sum of money at the end of the reporting period in comparison with its beginning. The increase in articles of short-term assets is characterized by use of means and, therefore, is regarded as outflow of money. Reduction of articles of short-term assets is characterized by release of means and regarded as inflow of money. Corrections of net profit or loss are made for elimination of divergences in formation of pure financial result and a pure cash flow taking into account: –– changes in stocks, receivables, short-term financial investments, short-term obligations, excepting loans and the credits, during the period; –– non-monetary articles: depreciation of long-term assets; exchange differences; the profit (loss) of last years revealed in the reporting period and another; –– financial activity. As a result of correction of net profit real inflow (outflow) of money from operating, financial and investment activities is established. For calculation of a gain or decrease in money from operating activities it is expedient to carry out the following operations: 1) to calculate short-term assets and short-term obligations, proceeding from a method of an assessment of cash flows. When updating articles of short-term assets it is necessary to subtract their gain from net profit, the organization being at the command after the taxation, and for the analyzed period to add their decrease to this profit. When updating short-term obligations, on the contrary, their gain should be added to net profit as it doesn’t mean outflow of money; reduction of these obligations is subtracted from net profit;

54

2. Methods of an assessment of cash flows

2) to correct net profit on the expenses which aren’t demanding payment of money. For this purpose these expenses (depreciation of fixed assets and intangible assets) for the period should be added to net profit; 3) to exclude influence of profit and the losses received not from operating activities to which financial results from realization of longterm assets and securities of other issuers concern. The influence of these operations considered also at calculation of net profit in the profit and loss report is corrected for an exception of the repeated account in the following order: a) losses from these operations should be added to net profit; b) the income from these operations needs to be subtracted from the sum of net profit. Besides, in this section in order to avoid the repeated account influence on net profit of those articles which are considered also in sections of investment and financial activity is excluded. Thus, depreciation of fixed assets and intangible assets is the significant non-monetary factor influencing the size of a cash flow. In accounting depreciation charges are treated as an element of product cost and services. Therefore at calculation of cash flows for the period it is necessary to restore the sum of these assignments, that is it is necessary to add the sum of the added wear to the size of net profit. Influence of non-monetary articles on the size of a cash flow should be defined as follows: –– the sums of residual cost not to the amortized fixed assets and other long-term assets at their write-off carry on reduction of financial result. As sale of different types of property is reflected in profit in the form of a difference between the price of realization and residual cost while inflow of money in the reporting period happens in the full sum equal to the realization price, the residual cost of property has to be added to profit; –– material inputs in structure of product cost join in process of their holiday in production, however payment of accounts on their acquisition is a real outflow of money therefore the

2.2. Indirect method of an assessment of cash flows

55

sum of increase in production stocks and expenses should be subtracted from profit. At the same time return of materials at elimination of fixed assets or from production isn’t followed by outflow of money therefore the profit increases by the corresponding sum; –– in case of growth of account balances of short-term obligations inflow of money in this connection it is necessary to increase profit by this sum takes place. When using an indirect method the net profit or a loss of the organization are corrected taking into account results of operations of non-monetary character, and also changes which happened in operational working capital. Thus, this method: –– shows interrelations between different types of activity of the organization; –– establishes dependence between net profit and changes in working capital of the organization for the reporting period. For an indirect method it is necessary to remember the following rules. We take net profit and we correct it on all non-monetary articles to come to the cash flows presented in the report on cash flow. Three types of adjustments are applied to an indirect method: 1. Adjustments on non-monetary components of the income and expenses relating to operating activities: –– the increase in short-term assets – is subtracted; –– reduction of short-term assets – increases; –– the increase in obligations – increases; –– reduction of obligations – is subtracted. 2. Adjustments on the income and expenses, not leaders neither to receiving, nor to payment of money: –– expenses – increases; –– the income – it is subtracted. 3. Adjustments on the income and expenses which aren’t relating to operating activities: –– expenses – increases; –– the income – it is subtracted.

56

2. Methods of an assessment of cash flows

The algorithm of formation of a cash flow from operating activities by an indirect method includes realization of the following stages: 1) according to the reporting the net profit of the organization is defined; 2) the sums of articles of the expenses which aren’t causing cash flow in reality are added to net profit (for example, depreciation); 3) are subtracted any increases (reduction) which occurred in articles of short-term assets except for the article «Money and Their Equivalents» (increase). 4) increase any increases (reduction) which occurred in articles of the short-term obligations which aren›t demanding percentage payments (are subtracted). Estimating pure cash flows on kinds of activity it must be kept in mind the following: –– the pure cash flow from operating activities has to be positive; –– the positive cash flow from operating activities is an evidence of successful activity of the organization and possibility of further development at the expense of own means; –– the pure cash flow from investment activity has to be negative (that is payments have to exceed receipts as investment activity is connected with acquisition and sale of long-term assets), testifies that considerable investments into long-term assets are carried out and probably capacities of the organization extend; –– the pure cash flow from financial activity has to be positive (as this activity is connected with change of own invested capital and borrowed funds), it testifies that the organization finances the extending activity by external sources (and not just retained earnings and accounts payable); –– for the stable developing organization payments and receipts from operating activities have to prevail in cumulative receipts and payments. Calculations of the sum of a pure cash flow of the organization from investment and financial activity, and also on the organization in

2.2. Indirect method of an assessment of cash flows

57

general are carried out by an indirect method on the same algorithms, as at a direct method. Preparation of the report on cash flow on the basis of an indirect method takes place in some stages: 1) calculation of changes for articles of balance and definition of the factors influencing increase or reduction of funds of the organization; 2) analysis of the ����������������������������������������������� «���������������������������������������������� Profit and loss report������������������������ »����������������������� form 2 and classification of sources of money and directions of use; 3) combination of the obtained data in the report on cash flow. To estimate all directions of receipt (inflows) and leavings (outflows) of funds of the organization by an indirect method it is possible to make by means of table 6. Table 6

The scheme of cash flow from operating activities (an indirect method) Indicators 1 1. Profit (loss) to the taxation 2. The operations correcting net profit: – change of depreciation and depreciation of fixed assets and intangible assets – depreciation of goodwill – depreciation of trade and other receivables – write-off of cost of the assets (or the leaving group) intended for sale at fair value minus costs of sale – loss (profit) on leaving of fixed assets – loss (profit) on investment property – loss (profit) on early repayment of loans – a loss (profit) on the other financial assets reflected at fair value with adjustment through the profit and loss report – change of expenses (income) on financing

Positive cash flow 2 х

Negative cash flow 3 х

х

х

х

х х

х х х х

х х х х

х

х

58

2. Methods of an assessment of cash flows

1 – change of remunerations to workers – change of expenses on remunerations by share tools – the income (expense) on the postponed taxes – unrealized positive (negative) exchange difference – change of a share of the organization in profit of the associated organizations and the joint activity considered on a method of individual share – other non-monetary operational corrections of the general cumulative profit (loss) – changes in stocks – changes of a reserve – changes in trade and other receivables – changes in trade and other accounts payable – changes in debt on taxes and other obligatory payments in the budget – changes in other short-term obligations – the paid remunerations – plachenny income tax 3. Pure sum of money from operating activities

х х х х

2

х х

3

х х

х х

х

х х х х х

х х х х х

х

х х х х

х

To receive change of the rest of money for the period, to net retained earnings it is necessary to add: –– an increment of own capital at the expense of other causes; –– increment of the credits and loans; –– increment of wear of depreciable long-term assets and to subtract: –– an increment of long-term assets (at initial or recovery cost); –– increment of stocks; –– receivables increment; –– increment of short-term financial investments. Thus it must be kept in mind that increments for the reporting period can be both positive, and negative; at subtraction they respectively change a sign for the opposite.

2.2. Indirect method of an assessment of cash flows

59

The indirect method is slightly simpler direct, and losses of quality of the provided information are minimum, however there is a probability of distortion of a true picture of cash flow as at its use absolute values of payments and receipts aren’t considered. The main lack of an indirect method is that the understanding of the provided information for the user of the reporting is complicated. From the report it isn’t visible, from what source money was received and on what they were spent. Only amendments to net profit on a charge method are reflected. The report on cash flow can be received from operating activities and by means of an indirect method. On algorithm of construction this method is the return to direct. The report made by an indirect method won’t show all turn of money, it will conditionally show a difference between receipt and leaving under separate articles. Besides, considering that expenses of the organization are formed with frequency in one month and with a considerable delay upon termination of the period, the report can’t be prepared quickly and, as a rule, prepares with frequency of providing interim financial statements. However analytical opportunities and presentation, a direct connection with financial result do the report made by an indirect method, the irreplaceable analytical tool. We will consider on an example drawing up the report on cash flow by an indirect method: 1. Net profit – 152 million tenges. 2. Adjustments on non-monetary articles. Depreciation doesn’t attract outflow of money, therefore, is the non-monetary item of expenditure. Expenses on depreciation are a part of net profit, for their exception to operating profit it is necessary to add depreciation (96 million tenges). The loss from sale of fixed assets, and also profit on issue of bonds are non-monetary articles therefore the loss (24 million tenges) increases, and the profit (64 million tenges) is subtracted. 3. Change of working capital. The increase in stocks conducts to reduction of money as if stocks are acquired and paid, so there was an outflow of money (56 million tenges).

60

2. Methods of an assessment of cash flows

Growth of receivables testifies to reduction of money (80 million tenges). Reduction of accounts payable, as a rule, happens by payment of money, i.e. decrease in accounts payable testifies to outflow of money (20 million tenges). Also there was an increase in expenses of future periods (8 million tenges), reduction of percent to payment (4 million tenges), increase in taxes (40 million tenges). We count streams from investment and financial activity how it is described in a direct method. Thus, the report on cash flow made by an indirect method will have the following appearance (tab. 7). Report on cash flow (indirect method) Indicators 1 Money from operating activities: The profit which isn’t shared from operating activities Adjustments: Depreciation Loss from realization of fixed assets Profit on repayment of bonds Increase in receivables Increase in stocks Increase in expenses of future periods Reduction of accounts payable Reduction of percent to payment Increase in taxes Pure cash flow from operating activities Money from investment activity: The money received from realization of fixed assets The money spent for purchase of fixed assets Pure cash flow from investment activity Money from financial activity:

Table 7

Sum, million tenges 2 152

96 24 (64) (80) (56) (8) (20) (4) 40 80 48 (40) 8

2.3. Method of a liquid cash flow

1 The money received from a share issue The money received on bonds The paid dividends Pure cash flow from financial activity Money and their equivalents for the beginning of the reporting period Money and their equivalents for the end of the reporting period

61

2 60 (72) (56) (68) 48 68

Sections of the report on investment and financial activity will coincide with data of table 5 as pay off only by a direct method. 2.3. Method of a liquid cash flow Except direct and indirect methods of an assessment of size of money there is a so-called method of a liquid cash flow allowing to calculate quickly a cash flow in the organization. It can be used for express diagnostics of a financial position of the organization. The liquid cash flow is an indicator of the scarce or excess balance of money arising in case of a full covering of all debt obligations on borrowed funds. The indicator of a liquid cash flow includes all volume of borrowed funds and, as a result, expresses influence of the credits and loans on efficiency of activity of the organization from the point of view of generation of monetary cash. The algorithm for calculation of a liquid cash flow has an appearance: LCF = (CLl-t.1 + CLs-t.1 - M1) - (CLl-t.0 + CLs-t.0 - M0). Example: CLl-t.1 = 4375,0 thousand tenges; CLl-t.0 = 5687,5; CLs-t.1 = 7266,0; CLs-t.0 = 6041,0; M1 = 1330,0; M0 = 1207,5 thousand tenges; LCF = (4375,0 + 7266,0 - 1330,0) - (5687,5 + 6041,0 - 1207,5) =-210,0 thousand tenges.

62

2. Methods of an assessment of cash flows

In this example the organization has scarce balance of a cash flow for the end of month in 210,0 thousand tenges. According to the Ledger it is possible to make dynamic ranks of indicators for the end of every month and to draw a conclusion on the level of solvency of the organization. The specified calculations can be done and on the lump of the credits, loans and money which arrived during the settlement period. Difference of an indicator of a liquid cash flow from other parameters of liquidity (absolute, intermediate, current) consists that the last reflect ability of the organization to repay the obligations to external creditors. The liquid cash flow characterizes an absolute value of the money received from operating activities of the organization therefore it is Bol the «internal» indicator expressing productivity of its work. It is important also for potential investors and creditors of this organization. The indicator of a liquid cash flow includes all volume of borrowed funds and, as a result, expresses influence of the credits and loans on efficiency of activity of the organization from the point of view of generation of monetary cash. Management of liquidity of the organization includes control of receipts and payments of money. The problem of management of liquidity of the organization consists in acceleration of receipts and reduction of the period between payment of settlement documents by clients and the moment when this money becomes available. At payments of money function of management is control over payments and minimization of the expenses of the organization connected with their implementation. The general period of receipts or payments depends on a form of clearing settlements between the supplier and the buyer. In a general view liquidity is defined as possibility of the organization to cover the long-term obligations to contractors. There are some levels of liquidity. Limited liquidity means that the organization can’t use favorable commercial opportunities in connection with restriction of a freedom of choice and actions of the guide to decision-making.

2.3. Method of a liquid cash flow

63

Low liquidity means that the organization isn’t capable to pay the short-term debt obligations that can result in need of sale of part of long-term assets, and in the worst option - to long insolvency and bankruptcy. In the Kazakhstan organizations a criterion of emergence of financial difficulties is the tendency of decrease in a share of money as a part of short-term assets at the increasing volumes of short-term obligations. Therefore the monthly analysis of money and the most urgent obligations (which repayment period expires in this month) can give an objective picture of surplus (shortcoming) of funds of the organization. More rational management of cash flows leads to increase of level of financial flexibility of the organization that is expressed in: –– operational management of a monetary turn from the point of view of balance of receipt and use of money; –– growth of volume and minimization of expenses on product sales due to expeditious maneuvering by resources of the organization; –– the maneuvering improvement by borrowed funds charac­ terized by decrease in expenses on percentage payments according to debt obligations; –– increase of liquidity of balance of the organization; –– possibilities of release of monetary resources for their investment into more profitable objects at rather low expenses on service of a debt; –– improvement of conditions of negotiations with suppliers and creditors; –– creation of reliable base for an assessment of overall performance of structural divisions of the organization (especially in the analysis of cash flows on kinds of activity); –– the forecast of ability of the organization to neutralization of threat of insolvency (bankruptcy) due to internal character. The indicator of a liquid cash flow can find broad application in activity of commercial banks at a solvency assessment as expresses degree and potential solvency at return of a debt to creditors.

64

2. Methods of an assessment of cash flows

The liquid cash flow is closely connected with concept of financial leverage (lever) characterizing a limit to which activity of the organization can be improved at the expense of the credits of bank. The effect of financial leverage is calculated on a formula: EFL = (1 - rcpt) · (EPa - rk.av) · (LC / OC). At positive value of EFL the organization has an increase to profitability of own capital (EPa > rk.av). At negative value of EFL (EPa < rk.av) – the deduction from profitability of own capital, that is the obtained bank credit is utilized inefficiently. Therefore, financial leverage - the objective factor arising with the advent of borrowed funds in a balance passive, allowing to get additional net profit on own capital. We will consider the mechanism of formation of effect of financial leverage on the example of three organizations: №2, №3, №4 (tab. 8). Table 8

Formation of effect of financial leverage № Indicators

Organizations №2 №3 №4

1 2 1 The average sum of all used capital in the considered period, thousand tenges – all 2 From it - average sum of own capital 3 Average sum of the loan capital, thousand tenges 4 The sum of gross profit (without expenses on payment of percent for the credit), thousand tenges 5 Coefficient of gross margin of assets (without expenses on payment of percent for the credit), % 6 The average level of percent for the credit, % 7 The sum of percent for the credit paid for use of the loan capital, thousand tenges [(col. 3 · col. 6) / 100]

3 4 5 5500,0 5500,0 5500,0 5500,0 3850,0 2750,0 0 1650,0 2750,0 1400,0 1400,0 1400,0 20

20

20

12 0

12 198

12 330

65

2.3. Method of a liquid cash flow

1 2 8 The sum of gross profit of the organization taking into account expenses for payment of percent for the credit, thousand tenges (col. 4 – col. 7) 9 The rate of income tax expressed by decimal fraction 10 Sum of income tax, thousand tenges (col. 8 col. 9) 11 The sum of net profit, the organization being at the command after payment of a tax, thousand tenges (col. 8 - col. 10) 12 Coefficient of profitability of own capital or coefficient of financial profitability, % [(col. 11 – col. 2) / 100] 13 Gain of profitability of own capital in connection with use of the loan capital, % (in relation to the organization №2)

3 4 5 1400,0 1202,0 1070,0

0,3

0,3

0,3

420,0

360,6

32,1

980,0

841,4

749,0

17,82

21,85

27,24

0

2,4

5,6

Considering the provided data, it is possible to see that on the organization №2 the effect of financial leverage is absent as it doesn’t use the loan capital in the activity. On the organization №3 this effect makes: EFL = (1 - 0,3) · (20 - 12) · (1650,0 / 3850,0) = 2,4%. Respectively on the organization 34 this effect makes: EFL = (1 - 0,3) · (20 - 12) · (2750,0 / 2750,0) = 5,6%. From results of the given calculations it is visible that the specific weight of borrowed funds in the total amount of the capital used by the organization is higher, the she receives bigger profit level on own capital. Considering earlier given formula of calculation of effect of financial leverage, it is possible to allocate in it three main components: 1) the tax proofreader of financial leverage (1 - rcpt) who shows in what degree is shown effect of financial leverage in connection with various level of the taxation of profit;

66

2. Methods of an assessment of cash flows

2) differential of financial leverage (EPa - rk.av) which characterizes a difference between coefficient of gross margin of assets and the average size of percent for the credit; 3) coefficient of financial leverage (LC / OC) which characterizes the sum of the loan capital used by the organization counting on unit of own capital. Allocation of these components allows to operate purposefully effect of financial leverage in the course of financial activity of the organization. The tax proofreader of financial leverage practically doesn’t depend on activity of the organization as the rate of income tax is established legislatively. At the same time, in process of management of financial leverage the differentiated tax proofreader can be used in the following cases: –– if on different types of activity of the organization the differentiated profit taxation rates are established; –– if on separate kinds of activity the organization uses tax privileges on profit. In these cases, influencing branch or regional structure of production (and respectively and on structure of profit on the level of its taxation), it is possible having lowered to raise an average rate of the taxation of profit impact of the tax proofreader of financial leverage on its effect. The differential of financial leverage is the main condition forming a positive effect of financial leverage. This effect is shown only if the level of the gross profit generated by assets of the organization exceeds an average interest rate on the utilized credit (including not only its direct rate, but also other specific expenses on its attraction, insurance and service). The positive value of differential of financial leverage is higher, the its effect will be higher with other things being equal. Due to the high dynamism of this indicator he demands continuous monitoring in process of management of effect of financial leverage. This dynamism is caused by a number of factors. First of all, during deterioration of an environment of the financial market (generally reductions of volume of the offer on it a spare capital) the cost of

2.3. Method of a liquid cash flow

67

borrowed funds can sharply grow, having exceeded the level of the gross profit generated by assets of the organization. Besides, decrease in financial stability of the organization in the course of increase of a share of the used loan capital leads to increase in risk of its bankruptcy that compels creditors to increase percent rate level for the credit taking into account inclusion in it of an award for additional financial risk. At a certain level of this risk (and respectively and the level of the general rate of percent for the credit) the differential of financial leverage can be brought to naught (at which use of the loan capital won’t give a gain of profitability of own capital) and even to have the negative size (at which profitability of own capital will decrease as the part of the net profit generated by own capital will leave on service of the used loan capital at the high rates of percent). At last, during deterioration of an environment of the commodity market the volume of product sales, and respectively and the size of gross profit of the organization on operating activities is reduced. In these conditions the negative size of differential of financial leverage can be formed even at invariable rates of percent for the credit due to decrease in coefficient of gross margin of assets. Formation of negative value of differential of financial leverage on any of the above-stated reasons always leads to decrease in coefficient of profitability of own capital. In this case use of the loan capital by the organization gives a negative effect. The coefficient of financial leverage is that lever which gears up the positive or negative effect gained due to the corresponding value of differential. At positive value of differential any gain of coefficient of financial leverage will cause still a bigger gain of coefficient of profitability of own capital, and at negative value of differential the gain of coefficient of financial leverage will result in even bigger rate of decrease in coefficient of profitability of own capital. Thus, at invariable differential the coefficient of financial leverage is the main generator as increases of the sum and profit level on own capital, and financial risk of loss of this profit, that is in certain cases the price of attraction of the loan capital can be higher, than the price of attraction of the capital from own sources.

68

2. Methods of an assessment of cash flows

Control questions 1. On what the direct method of an assessment of cash flows is based? 2. What does the direct method give estimates of cash flows? 3. How the rest of money by a direct method pays off? 4. How the sum of a pure cash flow calculates from operating activities at a direct method? 5. What includes algorithm of recalculation at a direct method of an assessment of cash flows? 6. In what complexity of a direct method of an assessment of cash flows? 7. In what essence of an indirect method of an assessment of cash flows? 8. How ChDP in a general view by an indirect method pays off? 9. How ChDP calculates from operating activities by an indirect method? 10. How corrections of net profit at an indirect method are subdivided? 11. What operations it is expedient to carry out for calculation of a gain or decrease in money from operating activities at an indirect method? 12. How to exclude influence of profit and the losses received not from operating activities at an indirect method? 13. How influence of non-monetary articles on the size of a cash flow at an indirect method is defined? 14. What includes algorithm of formation of cash flows at an indirect method? 15. What it must be kept in mind at an assessment of pure cash flows by an indirect method? 16. How preparation of the report on cash flow on the basis of an indirect method is made? 17. What is understood as a liquid cash flow? 18. What such financial leverage? 19. What represents algorithm of a liquid cash flow? 20. What the organization at positive value of effect of financial leverage has?

2.3. Method of a liquid cash flow

69

Tests 1. The report on cash flow is formed by two methods: a) by a direct method and by method of charges; b) by a direct method and indirect; c) simple and detailed; c) mathematical and analytical. 2. The assessment of cash flow by an indirect method assumes: a) definition of inflow (outflow) of money by each type of activity; b) definition of interrelation between financial result and cash flow; c) definition of financial result of activity of the organization. 3. When using an indirect method of an assessment of cash flows it is corrected: a) receivables rest sum; b) the sum of the rest of money for the end of the period; c) the sum of net profit for the analyzed period 4. The indirect method of the analysis of money allows: a) to define coefficients of financial stability of the organization; b) to estimate structure of positive and negative cash flows; c) to give an assessment of the reasons of discrepancy of sizes of net profit and a pure cash flow for the analyzed period 5. When using an indirect method of the analysis of cash flows the increase in the rest of receivables for the period is necessary: a) to add to the sum of net profit; b) to subtract from the sum of net profit; c) to leave an indicator of net profit without change. 6. The direct method of the analysis of cash flows allows: a) to establish sufficiency of a pure cash flow on operating activities for financing of investment investments; b) to estimate efficiency of investment activity; c) to calculate influence of factors on formation of profit on realization. 7. When using an indirect method of the analysis of cash flows reduction of the rest of debt on the credits for the period is necessary: a) to add to the sum of net profit;

70

2. Methods of an assessment of cash flows

b) to subtract from the sum of net profit; c) to leave an indicator of net profit without change. 8. The gap between terms of payments according to obligations to suppliers and receiving money from buyers characterizes dura­­tion: a) production operating cycle; b) financial cycle; c) operational cycle. 9. Inflow of money on operating activities is formed: a) the obtained long-term credits and loans; b) the advance payments received from buyers and customers; c) dividends and percent on short-term financial investments. 10. On an assessment method in time distinguish: a) pure cash flow; b) real cash flow; c) scarce cash flow. 11. The operational rest of monetary assets is formed on purpose: a) ensuring the current payments connected by production and commer­ cial activity of the organization; b) insurance of risk of untimely receipt of money from operating activities; c) implementation of effective short-term financial investments. 12. Duration of a turn of money can be reduced for the account: a) increases in duration of a turn of inventory items; b) reductions of duration of a turn of receivables; c) reductions of a cycle time 13. What positions correspond to the concept «stream»? a) payment of the arrived raw materials and materials; b) debt of the organization for payment of a salary; c) payment of awards; d) payment of dividends; e) the rest of money for the beginning of the period.

2.3. Method of a liquid cash flow

71

14. How the type of the analysis of cash flows directed on the solution of a priority financial problem is called? a) the thematic; c) the focused; b) the quick; d) the local. 15. The form 3 «Report on cash flow» in Kazakhstan is formed: a) by a direct method; b) by an indirect method; c) the matrix.

72

3. Analysis of absolute measures of cash flows

3. ANALYSIS OF ABSOLUTE MEASURES OF CASH FLOWS

3.1. Horizontal analysis of cash flows The horizontal analysis of cash flows allows to calculate and estimate absolute changes and growth rates of the remains of money for the end of the period in comparison with its beginning in two years (previous and reporting). Besides, under each article of receipt and payments of money in a section of each kind of activity dynamics of their inflow and outflow is estimated. A basis of this method is the analysis of all indicators under each separately taken analytical article. In a control system of cash flows the greatest distribution was received by the following types of the horizontal analysis: –– the analysis of dynamics of indicators of a cash flow of the reporting period in comparison to indicators of the previous period (for example, with indicators of the previous month, quarter, year); –– the analysis of dynamics of indicators of a cash flow of the reporting period in comparison to indicators of the similar period of last year (for example, indicators of the second quarter of the reporting period with similar indicators of the second quarter of the previous year). This type of the horizontal analysis is applied in the organizations with pronounced seasonal features of economic activity; –– the analysis of dynamics of indicators of a cash flow for a number of the previous periods. The purpose of this type of the analysis is identification of a tendency of change of the separate indicators characterizing results of functioning of monetary assets of the organization (definition of the line of a trend in dynamics). All types of the horizontal analysis of cash flows are supplemented usually with research of influence of separate factors on change 72

73

3.1. Horizontal analysis of cash flows

of the corresponding productive indicators. Results of such analytical research allow to construct the corresponding dynamic factorial models which are used then in the course of planning of cash flows of the organization. In the horizontal analysis use two approaches: 1) comparison change in absolute values (for example, tenge); 2) comparison of changes in relative (percentage) sizes. As a rule, in the report the analyst uses both approaches. Thus as more evident approach the analysis of change as a percentage to previous (or to the first) to the period acts. Further, based on data of the carried-out analysis, optimization of cash flows is performed. That will allow to reveal and eliminate the reasons of negative or too big cash flow. In case a cash flow negative, all available means can depreciate as a result of inflationary processes. And in case of too large sum of a pure cash flow, the organization risks to be insolvent as there will be an acute shortage of financial resources. We will make the analysis of dynamics of volume of cash flows on the basis of information of a form 3 «Report on cash flow (a direct method)» of the organization №5 with drawing up analytical table 9. Analysis of dynamics of volume of cash flows Sum of the Change Growth monetary (+, -) rate, % Indicators streams, million tenges 2012 2013 1 2 3 4 5 The rest of money for 46,40 185,46 +139,06 399,70 the beginning of year I. Cash flow from operating activities Receipt of money - all, 8406,75 10827,69 +2420,94 128,80 including: – product sales 2844,53 7895,83 +5051,30 277,58 – realization of fixed 181,98 33,14 -148,84 18,21 assets

Table 9 Rate of a gain, % 6 299,70 28,80 177,58 -81,79

74

3. Analysis of absolute measures of cash flows

1 2 3 4 5 – realization of other 8,41 -8,41 long-term assets – the earned rewards 376,76 863,52 +486,76 229,20 – other receipts 4995,07 2035,20 -2959,87 40,74 Leaving of money 8400,72 9786,68 +1385,96 116,50 – all, including: – payments to 2386,69 4182,27 +1795,58 175,23 suppliers for production – payments for 1388,36 1571,32 +182,96 113,18 compensation – calculations for 1076,20 1432,66 +356,46 133,12 taxes and fees – other payments 3549,47 2600,43 -949,04 73,26 Cash flow from 6,03 1041,01 +1034,98 17264 operating activities II. Cash flow from investment activity Receipt of money Leaving of money Cash flow from investment activity III. Cash flow from financial activity Receipt of money 462,71 -462,71 all, including: – the obtained loans 462,71 -462,71 Leaving of money 329,68 40,67 -289,01 12,34 – all, including: – repayment of loans 329,68 40,67 -289,01 12,34 Cash flow from 133,03 -40,67 -173,70 -30,57 financial activity Pure cash flow 139,06 1000,34 +861,28 719,36 The rest of money on 185,46 1185,80 +1000,34 639,38 the end of the year

6 -100,00 129,20 - 59,26 16,50

75,23 13,18 33,12 - 26,74 17164 -100,00

-100,00 - 87,66

- 87,66 -130,57 619,36 539,38

3.1. Horizontal analysis of cash flows

75

On the basis of data of table 9 dynamics of cash flows with calculation of absolute deviations, growth rates and rates of a gain is studied, tendencies of change of cash flows are established. Growth rates of a pure cash flow are compared with growth rates of assets and growth rates of volume of product sales. The analysis allows to study dynamics of volume of formation of a positive, negative and pure cash flow in a section of separate sources. For the analyzed period the positive cash flow tended to increase in the absolute value. In 2012 it made 8869,46 million tenges, and in 2013 - 10827,69 million tenges, i.e. rate of a gain made 22,08%. Dynamics of change of a negative cash flow (outflow of means) also keeps a tendency to increase. (in 2012 - 8730,40 million tenges, in 2013 - 9827,35 million tenges). However its growth rates it′s slightly less, than for a positive stream. This fact allowed to increase the sum of funds of the organization from 185,46 million tenges by the beginning of the period to 1185,80 million tenges for the end of 2011. As a result of implementation in 2013 of financial and economic activity the organization №5 significantly increased the volume of money supply in part as receipts of money, and their outflow. This situation can be assessed positively as it is a consequence of growth of scales of production and product sales. The positive moment – excess of inflow of money over their outflow which provided achievement of positive value of a pure cash flow of 1000,34 million tenges. The sum of a positive cash flow in 2013 increased in comparison with 2012 by 1958,23 million tenges, rate of a gain made 22,08%. Value of a negative cash flow increased for 1096,95 (1385,96 - 289,01) million tenges, or for 12,56%. Considering indicators of cash flows on kinds of activity, it should be noted that the greatest volume of money supply is provided by operating activities of the organization. The sum of inflow of money from this kind of activity in 2013 made 10827,69 million tenges that for 2420,94 million tenges it is more than in previous year. Specific weight of this indicator in a total amount of all monetary receipts made 100% in 2013.

76

3. Analysis of absolute measures of cash flows

Comparison of data of inflow and outflow of money from operating activities testifies to the available excess of inflow over outflow in 2012 for the sum of 6,03 million tenges, in 2013 – for the sum of 1041,01 million tenges. It can be considered the positive fact as operating activities have to provide a condition of sufficiency of money for implementation of operations on investment and financial activity. Outflow of money from operating activities in 2013 increased in comparison with 2012 for 1385,96 million tenges, rate of a gain made 16,50% that is quite blocked by a large increase of inflow of money on this kind of activity. The pure cash flow in 2012 made 139,06 million tenges, and in 2013 - 1000,34 million tenges, that is increased by 7,2 times. It should be noted that at excess of inflow of money over outflow from operating activities in 2013 the organization №5 didn’t carry out operations in investment and financial activity. Further we will carry out the analysis of dynamics of assets of the organization, volumes of realization of goods and services and a pure cash flow, having compared rates of a gain according to assets, production (realization) of production with rates of a gain of a cash flow (tab. 10). Growth rates of assets, volumes of product sales and pure cash flow Indicator

Total assets of the organization Proceeds from sales of production Pure cash flow

Sum of a cash flow, million tenges

Table 10

Change (+, -)

Growth rate, %

2012 г. 11752,53

2013 г. 13008,97

+1256,44

110,69

2844,53

7895,83

+5051,30

277,58

139,06

1000,34

+861,28

719,36

3.2. Vertical analysis of cash flows

77

For normal functioning of the organization and increase of its financial stability and solvency it is required that growth rates of volumes of product sales were above growth rates of assets, and growth rates of a pure cash flow advanced growth rates of volume of realization. In 2013 this dependence was carried out completely. That fact that growth rates of a pure cash flow by 2,6 times exceed growth rates of realization, positively influences solvency. 3.2. Vertical analysis of cash flows The vertical analysis of cash flows allows to gain an evident impression about what share make this or that income and expenses in the total amount of the income and expenses that allows to judge extent of their influence on activity of the organization. In the course of this analysis as a part of the general cash flow allocate cash flows from operating, investment and financial activities of the organization. Results of the vertical analysis usually are also made out graphically. In a control system of cash flows the greatest distribution was received by the following types of the vertical analysis: –– structural analysis of cash flows of the organization for types of economic activity (operational, investment and financial). It allows to establish a share of each kind of activity in formation entering, proceeding and a pure cash flow. Studying of structure of a cash flow on separate sources and uses of money gives the chance to establish a share of each of them in formation of a cash flow on the organization in general; –– the structural analysis of cash flows on internal divisions of the organization («the centers of responsibility»). Results of this analysis form base of carrying out the subsequent profound comparative and factorial analysis of efficiency of formation of cash flows of the organization; –– the structural analysis of a positive (negative) cash flow on separate elements of its formation. Such analysis allows to reveal the major making elements of formation of positive or

78

3. Analysis of absolute measures of cash flows

negative cash flows of the organization taking into account specifics of its financial and economic activity. When carrying out the vertical analysis the whole part is equated to 100%, and the specific weight of each component is estimated. As the whole parts results of balance, the profit and loss report, report on cash flow act. The analysis of structure and structure of cash flows on kinds of activity (operational, investment, financial) we will carry out on the example of the organization №6. For this purpose we will use table 11 made on the basis of a form 3 «Report on cash flow» (a direct method). The vertical analysis of cash flows on kinds of activity Indicator 1 The rest of money for the beginning of year 1. Receipt – all, including: proceeds from sales of production other income 2. Leaving – all, including: – on payment of production – on compensation – calculations for taxes and fees – other expenses

2012 thousand % tenges 2 3 404 -

2013 thousand % tenges 4 5 84 -

I. Cash flow from operating activities 26488 100 24348 100

Table 11

Changes (+, -) thousand % tenges 6 7 -320 -

-2140

-

26472

99,94

24304

99,82

-2168

-0,12

16 24888

0,06 100

44 23200

0,18 100

+28 -1688

+0,12 -

18880

75,86

16976

73,17

-1904

-2,69

3188

12,81

3788

16,33

+600

+3,52

1060

4,26

852

3,67

-208

-0,59

1760

7,07

1584

6,83

176

-0,24

79

3.2. Vertical analysis of cash flows

1 3. Pure cash flow

2 3 4 5 6 1600 1148 -452 II. Cash flow from investment activity 4. Receipt 5. Leaving 6. Pure cash flow III. Cash flow from financial activity 7. Receipt – all, 6000 100 +6000 including: – loans and 6000 100 +6000 credits 8. Leaving – all, 1920 100 7188 100 +5268 including: – short-term 1920 100 7188 100 +5268 financial investments 9. Pure cash flow -1920 100 -1188 +732 10. Total pure -320 -40 +280 increase (+), reduction (-) money The rest of 84 44 -40 money on the end of the yea

7 +100 +100 -100 -

-

From table 11 it is visible that the means received from buyers, customers (99,82%) were the main source of receipt of money from operating activities in 2013. An additional source of money this year were the other income (0,18%). Among articles of an expenditure of money article of payment of the acquired production (73,17%) became prevailing, it is also necessary to allocate expenses on compensation (16,3%), calculations for taxes and fees (3,67%) and an other expenses (6,83%). Pure inflow of money from operating activities by results of 2013 made 1148 thousand tenges that is less than an indicator of 2012 for 452 thousand tenges. In a section of investment activity in the organization No. 6 there was no cash flow.

80

3. Analysis of absolute measures of cash flows

Proceeding from data of the analysis, it is possible to draw a conclusion that use of borrowed funds by the organization in 2013 positively affected increase in a cumulative cash flow (+6000 thousand tenges). The cumulative result characterizing change of money in the organization consists of the sum of results of their movement on each kind of activity. Pure reduction of money for 2013 made 40 thousand tenges that for 280 thousand tenges there is more than total amount of outflow of money in 2010 (-320 thousand tenges). Influence of factors is estimated on the sums of pure money on kinds of activity. 3.3. Matrix method of the analysis of cash flows One of the main methods of the analysis of cash flows is the matrix method. Matrix models found broad application in the field of forecasting and planning of cash flows of the organization. The matrix model represents the rectangular table which elements reflect interrelation of objects. It′s convenient for the financial analysis as is a simple and evident form of combination of diverse, but interconnected economic events. The matrix balance is derivative of a standard form of balance of the organization which the table where there will be articles of a passive across can present easily in the form, and down – assets. Dimension of a matrix of the balance sheet can correspond to number of assets and a passive, but for practical purposes there is enough dimension 10х10 in the reduced balance form. Matrix balances allow: –– to define coordination of assets and articles of a passive of balance; –– to calculate structure and to determine quality of assets by balance of the organization and sufficiency of sources of their financing; –– to calculate all set of indicators and the coefficients necessary for an assessment of financial stability, solvency, use of resources of the organization;

3.3. Matrix method of the analysis of cash flows

81

–– objectively to estimate a financial position of the organization, to find out the reasons of its change for the reporting period; –– to establish the parameters characterizing approach of the organization to an insolvency threshold. Creation of matrix balance includes some stages: 1) a balance matrix size choice depending on the available purposes of its subsequent use. The matrix balance has a statistical property and shows a condition of funds for the beginning and the end of the period; 2) transformation of standard balance of the aggregated balance by the chosen matrix size; 3) creation of a matrix of balance and filling of total lines and columns in strict accordance with the aggregated balance; 4) selection of sources of the means which are at the disposal of the organization according to the rule of «gold financing»; 5) calculation and check of balance results in a matrix; 6) creation of the differential (dynamic) matrix balance reflecting change of money for the period which results can be used for expected and analytical calculations. Now, heads of the organizations face a problem of efficiency of financing of assets. Each group of assets has certain regularities of financing. These regularities are reflected in the standard rules of «gold financing»: –– financial resources, necessary for investments, have to be at the disposal of the organization until they remain connected as a result of implementation of these investments; –– «golden rule» of management of accounts payable of the organization consists in the greatest possible increase in a repayment period without damage of violation of the developed business relations. The most responsible and difficult in creation of matrix balance is the stage of selection of sources of the means which are at the disposal of the organization according to the rule of «gold financing». Regularities of financing of various groups of assets of the organization are reflected in this rule.

82

3. Analysis of absolute measures of cash flows

Competent financing of assets is expressed in the following: 1) financial resources, necessary for investments, have to be at the disposal of the organization until they remain connected as a result of implementation of these investments. Understand the volume of financial resources which constantly has to have the organization for ensuring smooth functioning of the operating activities as the connected resources; 2) for management of accounts payable of the organization «gold financing» consists in the greatest possible increase in a repayment period without damage of violation of the developed business relations. Practical application of «golden rule» is expressed in a strict regulation of sources of financing of assets of the organization and an order of their use. Selection of sources of financing is carried out in the sequence given in table 12 within the rest of money after providing at the expense of this source of the previous assets, and attraction of each subsequent source speaks about some decline in quality of financial security of the organization. Order of financing of assets of the organization Assets

Liabilities

1

2 1. Short-term assets

1.1. Money

1. Short-term accounts payable 2. Short-term loans 3. Current tax obligations 4. Reserves 5. Retained earnings

1.2. Short-term debit debt

1. Short-term accounts payable 2. Short-term loans 3. Current tax obligations

Table 12

83

3.3. Matrix method of the analysis of cash flows

1.3. Stocks

1

2 1. Short-term accounts payable 2. Long-term accounts payable 3. Short-term loans 4. Long-term loans 5. Retained earnings 1. Short-term accounts payable 2. Long-term accounts payable 3. Reserves

1.4. Short-term financial investments

2. Long-term assets 2.1. Long-term debit debt 1. Short-term accounts payable 2. Long-term accounts payable 3. Short-term loans 4. Long-term loans 2.2. Fixed assets and intangible 1. Long-term loans assets 2. Authorized (joint-stock) capital 3. Issue income 4. Retained earnings 2.3. Long-term financial investments

1. Long-term loans 2. Authorized (joint-stock) capital 3. Issue income 4. Retained earnings

Calculation of cash flows with use of a matrix method is presented in tables 13 - 15. Table 13

The aggregated balance Name of articles

For the beginning period

For the end period

Change (+, -)

1

2

3

4

1. Money

48

68

20

Assets

84

3. Analysis of absolute measures of cash flows

1 2. Short-term receivables 3. Stocks

2 160

3 240

4 80

280

336

56

4. Expenses of future periods 5. Total shortterm assets

16

24

8

504

668

164

6. Fixed assets

648

760

112

7. Total long-term assets Balance

648

760

112

1152

1428

276

Liabilities 1. Short-term accounts payable 2. Percent to payment 3. Taxes

160

140

20

16

12

4

48

88

40

4. Total shortterm obligations 5. Bonds for payment 6. Total long-term obligations 7. Common stocks 8. Retained earnings 9. Total capital

224

240

16

256

360

104

256

360

104

320

380

60

352

448

96

672

828

156

Balance

1152

1428

276

160 140

-

Money: – for the beginning of the period – for the end of the period

Short-term debit debt: – for the beginning of the period – for the end of the period

2

-

-

3

-

48 68

4

100

-

5

Short-term Percent Current Bonds creditor to tax to debt payment obligations payment

1

Assets

Liabilities

160 240

48 68

6

Total obligations

Matrix balance

-

-

7

The ordinary actions

-

-

8

Not shared profit

-

-

9

Total capital

160 240

48 68

10

Balance

Table 14

3.3. Matrix method of the analysis of cash flows 85

Total shortterm assets: – for the beginning of the period – for the end of the period

160 140

-

-

Stocks: – for the beginning of the period – for the end of the period

Expenses of future periods: – for the beginning of the period – for the end of the period

2

1

16 12

-

16 12

3

48 88

-

20

4

256 360

-

256 260

5

480 600

-

272 292

6

68

24

44

7

24 -

16 -

8 -

8

24 68

16 24

8 44

9

504 668

16 24

280 336

10

86 3. Analysis of absolute measures of cash flows

Balance: – for the beginning of the period – for the end of the period

Total longterm assets: – for the beginning of the period – for the end of the period

1 Fixed assets: – for the beginning of the period – for the end of the period

160 140

16 12

-

-

-

-

3

2

48 88

-

-

4

256 360

-

-

5

480 600

-

-

6

320 380

320 312

320 312

7

352 448

328 448

328 448

8

672 828

648 760

648 760

9

1152 1428

648 760

648 760

10

3.3. Matrix method of the analysis of cash flows 87

-4 -

-4

-

-4

-20

-

-20

40

-

40

20 -

104

-

104

4 -

100

-

20 -

-

-20

Money Short-term debit debt Stocks Expenses of future periods Total short-term assets Fixed assets Total long-term assets Balance

Assets

Short- Percent Current Bonds term to tax to creditor payment obligations payment debt

Liabilities

120

-

120

20 -

20 80

Total obligations

Differential (dynamic) balance

60

-8 -8

68

44 24

-

96

120 120

-24

-8 -16

-

The Not ordinary shared actions profit

156

112 112

44

36 8

-

276

112 112

164

56 8

20 80

Total Balance capital

Table 15

88 3. Analysis of absolute measures of cash flows

3.3. Matrix method of the analysis of cash flows

89

Control questions 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20.

On what the horizontal analysis of cash flows is based? What pays off in the course of use of the horizontal analysis? What is object of the horizontal analysis? What types of the horizontal analysis of cash flows are widespread in a control system? In what essence of research of dynamics of indicators of a cash flow of the reporting period in comparison to indicators of the previous period? In what essence of research of dynamics of indicators of a cash flow of the reporting period in comparison to indicators of the similar period of last year? Than the horizontal analysis of cash flows is supplemented? What gives the horizontal analysis of cash flows? On what the vertical analysis of cash flows is based? What types of the vertical analysis of cash flows are widespread in a control system? In what essence of the structural analysis of cash flows of the organization for types of economic activity (operational, investment and financial)? In what essence of the structural analysis of cash flows on internal divisions of the organization («the centers of responsibility»)? What features the vertical analysis possesses? In what advantages of the vertical analysis consist: What does the matrix model represent? In what essence of a matrix method of the analysis of cash flows? What it′s possible to make by means of matrix model? What stages are included by creation of matrix balance? In what the analytical value of matrix balance? What is the most responsible and difficult in creation of matrix balance?

Tests 1. What of the listed operations doesn’t treat the movement of cash flows by drawing up the report on cash flow?: a) definition of pure cash flows from investment activity;

90

3. Analysis of absolute measures of cash flows

b) definition of pure cash flows from operating activities; c) definition of pure cash flows from financial activity; d) definition of pure cash flows from the movement of means on the settlement account. 2. In what cases by drawing up the report on cash flow the «direct» and «indirect» method is used? a) when determining cash flows from all kinds of activity; b) when determining cash flows from financial activity; c) when determining cash flows from operating activities. 3. The way of calculation of cash flows on what (them) to a type(s) of activity has no essential differences when using direct and indirect methods according to IFRS? a) the operational; b) the investment; c) the financial. 4. Process of formation of own sources of monetary resources of the organization is connected from it: a) operating activities; b) investment activity; c) financial activity. 5. What of the listed operations aren›t reflected in the consolidated report on cash flow? a) return under the reporting sums; b) encashment of money from the settlement account in cash desk of the organization; c) cash flow between the head and affiliated organizations; d) the advance payments returned by suppliers. 6. Call an element of cash flows on financial activity according to the Kazakhstan standards: a) means from sale of bonds of other issuers; b) the means received from issue of bonds; c) the funds allocated for acquisition of a controlling stake.

3.3. Matrix method of the analysis of cash flows

91

7. What from given below treats definition of cash flows by a direct method? a) correction of sales proceeds; b) correction of prime cost of the realized production; c) correction of net profit; d) correction of operating expenses. 8. By drawing up the report on cash flow the indirect method makes the following adjustments: a) non-monetary expenses; b) non-monetary short-term assets and obligations; c) prime cost of the realized production; d) other profits and losses. 9. What of the listed operations don›t influence cash flow? a) receipts in cash desk; b) repayment of advance payments; c) write-off of hopeless receivables; d) placement of shares in stock market; e) converting of actions in the bond. 10. Outflow of money doesn›t include: a) repayment of receivables; b) repayment of accounts payable; c) the advance payments issued; d) acquisition of means of long-term use. 11. Promotes increase in a pure current of money: a) increase in cost of stocks of the organization; b) increase in accounts payable of the organization; c) increase in the sums of bills to receiving; d) increase in the sums of the advance payments received. 12. Promotes reduction of a pure current of money: a) reduction of cost of stocks of finished goods in a warehouse of the organization; b) reduction of debt of founders on deposits to authorized capital; c) reduction of debt by participants on payment of the income; d) reduction of the sums of bills for payment.

92

3. Analysis of absolute measures of cash flows

13. Leads to inflow of money: a) increase in short-term assets; b) increase in short-term obligations; c) increase in long-term assets; d) increase in own capital at the expense of a share issue; e) increase in expenses of future periods. 14. Leads to outflow of money: a) increase in short-term assets; b) reduction of long-term obligations; c) payment of dividends; d) repayment of own actions. 15. What of the given operations influences the size of money in the reporting period? a) announcement of dividends; b) exchange difference; c) write-off of hopeless debt; d) repayment of accounts payable.

4.1. Analysis of liquidity of cash flows

93

4. COEFFICIENT ANALYSIS OF CASH FLOWS

4.1. Analysis of liquidity of cash flows The coefficient analysis is an integral part of the analysis of cash flows. It is based on calculation of financial coefficients among themselves. The financial coefficient is the relative indicator counted as the relation of separate articles of balance and their combinations. By itself that, the balance sheet (form 1) forms for the coefficient analysis information base. In economic literature the coefficient analysis, as a rule, is understood as studying and the analysis of financial statements by means of a set of financial performance (coefficients). Purpose of the coefficient analysis – to describe the organization for several basic indicators which allow to judge its financial position. When carrying out the coefficient analysis it is necessary to consider that that, the normal or recommended values were defined on the basis of the analysis of activity of the western companies and not adapted for the Kazakhstan conditions. Besides it is necessary to treat a technique of comparison of coefficients with industry standards carefully. If in the developed countries the main proportions developed a decade ago, there is a continuous monitoring of all changes, in Kazakhstan the market structure of assets and liabilities of the organization is in a formation stage, monitoring in full isn’t conducted. And if to take distortions of the reporting, continuous updatings of rules of its drawing up into account, it is clear that removal enough reasonable new standards for branches is difficult. By means of the coefficient analysis levels and their deviations from planned and base-line values of various relative indicators characterizing cash flows are studied and also coefficients of liquidity and efficiency of cash flows of the organization pay off. In the course 93

94

4. Coefficient analysis of cash flows

of use of this system of the analysis various relative indicators characterizing separate indicators of cash flows, and extent of their influence on the general level of a financial position of the organization are defined. Important point in the coefficient analysis is the studying of dynamics of various coefficients allowing to establish the positive and negative tendencies reflecting quality of management of cash flows of the organization and also to develop necessary actions for introduction of the corresponding amendments for optimization of administrative decisions in the course of implementation of financial and economic activity. We will carry out the analysis of cash flows with application of financial coefficients (tab. 16). Settlement data for a coefficient method of the analysis of cash flows

Table 16

Indicator

2012

2013

1 Positive cash flow, thousand tenges Positive cash flow from operating activities, thousand tenges Negative cash flow, thousand tenges Negative cash flow from operating activities, thousand tenges Proceeds from sales of production, thousand tenges Net profit, thousand tenges Depreciation of fixed assets, thousand tenges Gain (decrease) of receivables, thousand tenges Gain of stocks of material short-term assets, thousand tenges Gain of accounts payable, thousand tenges

2 21998 19853

3 25597 23486

Change (+, -) 4 +3599 +3633

21996 20610

20658 18884

-1338 -1726

10099

12568

+2469

626 12882 201

148 47028 37

-478 +34116 -164

180

466

+286

228

461

+233

95

4.1. Analysis of liquidity of cash flows

1 2 Average size of own capital, thousand tenges 10286 Pure cash flow, thousand tenges 14117 Sum of money, thousand tenges 599 Average size of money, thousand tenges 720 Sum of short-term obligations, thousand 1085 tenges Sum of short-term financial investments, 0 thousand tenges Sum of short-term receivables, thousand 217 tenges Indicators of liquidity of cash flows

3 13226 48140 1309 920 1660

4 +2940 +34023 +710 +200 +575

0

0

350

+133

Coefficient of liquidity of a cash flow 1,00 Coefficient of absolute solvency 0,552 Coefficient of intermediate solvency 0,752 Coefficient of the current solvency 0,963 Indicators of efficiency of cash flows

1,24 0,788 0,999 1,244

+0,24 +0,236 +0,247 +0,281

Coefficient of security with money 12,751 Coefficient of sufficiency of a pure cash flow 78,43 Effectiveness ratio of a pure cash flow 0,642 Coefficient of profitability of a positive cash 0,028 flow Coefficient of profitability of a negative cash 0,028 flow Coefficient of profitability of average size of 0,689 money Coefficient of profitability of a pure cash flow 0,044 Coefficient of turnover of average size of 14,03 money

17,782 103,30 2,330 0,006

+5,031 +24,87 +1,688 -0,022

0,007

-0,021

0,161

-0,519

0,003 13,66

-0,041 -0,37

For calculation of necessary coefficients it is necessary to calculate an indicator of a pure cash flow: 2012 of CFpur = 626 + 12882 + 201 + 180 + 228 = 14117 thousand tenges;

96

4. Coefficient analysis of cash flows

2013 of CFpur = 148 + 47028 + 37 + 466 + 461 = 48140 thousand tenges. The pure cash flow in 2013 for 34023 thousand tenges is more than pure cash flow of 2012 (48140 - 14117). This increase resulted from significant increase in such indicators, as an accounts payable gain for 233 thousand tenges; a gain of stocks of material short-term assets for 286 thousand tenges. In the course of the analysis it is featured «quality of a pure cash flow» – the generalized characteristic of structure of sources of formation of this indicator. High quality of a pure cash flow is characterized by growth of specific weight of the net profit got due to increase in production of production, decrease in its prime cost, and low - at the expense of the increase in a share of net profit connected with increase in prices on production, implementation of non-operating operations, etc. At the same time, it is necessary to investigate synchronism of formation of posi-tive and negative cash flows in a section of separate intervals of the reporting period; the dynamics of the remains of monetary assets of the organization reflecting the lev-el of this synchronism and providing absolute solvency is considered. In the course of the analysis of synchronism of formation of cash flows the liquidity coefficient pays off. The coefficient of liquidity of a cash flow made: 2012 Ccf = 21998 / 21996 = 1,00; 2013 Ccf = 25597 / 20658 = 1,24. For ensuring necessary liquidity of a cash flow this coefficient has to matter not lower than 1 (excess 1 will generate growth of the rest of monetary assets for the end of the considered period, that is to promote increase of coefficient of absolute solvency of the organization). In our case the rules are respected in 2012, however in 2013 considerable excess of norm takes place. The coefficient of solvency shows possibility of the organization to provide out-flow of money with their receipt. As we see in 2013 the coefficient of the current solvency increased on 0,281 point and the organization has enough means for payment of the short-term obligations.

4.2. Analysis of efficiency of cash flows

97

The tendency of reduction of a share of money as a part of shortterm assets of the organization at the increasing volume of its shortterm obligations serves as a barometer of emergence of financial difficulties. Therefore the analysis of a ratio of money and short-term obligations can give a short-term picture of surplus or a lack of money at an economic entity. In 2013 the coefficient of absolute solvency increased on 0,236 points, in connection with increase in inflow of money by 710 thousand tenges in comparison with increase in volume of short-term obligations by 575 thousand tenges. 4.2. Analysis of efficiency of cash flows Overall performance of the organization depends on many factors which can be divided into the external, having impact regardless of interests organizations, and in-ternal on which the organization can and has to influence actively. These factors can be, both positive, and negative. The damage from these factors can be reduced at ef-fective and correct use of money. For an assessment of efficiency of use of money define indicators of sufficiency, turnover and profitability of money. Indicators of turnover of money consider as indicators of liquidity of a cash flow which provide maintenance of constant solvency of the organization. Turnover in days characterizes the period during which money is on accounts of the organization without the movement. Such indicator allows to determine the size of the rest of money. Indicators of profitability of money characterize, what size of a pure cash flow is the share of one tenge of the money which is at the disposal (spent or received) to the organization during the studied period. These indicators calculated on net profit need to be determined as in general by the organization, and by kinds of activity. The profitability indicators calculated on profit allow to establish return of money, or, in other words, to define economic effect of use of this type of means. From table 16 it is visible that the coefficient of sufficiency of a pure cash flow in 2013 in comparison with 2012 increased on

98

4. Coefficient analysis of cash flows

24,87 (103,30 - 78,43). This fact says that the organization has enough money for financing of the requirements. To gain an impression about real cash flow in the organization, to estimate syn-chronism of receipts and payments, and also to coordinate profit to a condition of money, it is necessary to allocate and analyse all directions of receipt of money, and also their leavings. The purpose of the analysis of cash flow – to estimate ability of the organization to generate money in a size and in the terms necessary for implementation of the planned expenses. Solvency and liquidity of the organization often are depending on a real monetary turn in the form of a stream of the monetary payments passing through accounts of an economic entity. Therefore the analysis of cash flow signifi-cantly supplements a technique of an assessment of liquidity and solvency and gives the chance more objectively to estimate financial wellbeing of the organization. The coefficient of turnover of money made: 2012 Ctm = 10099/720 = 14,03; 2013 Ctm = 12568/920 = 13,66. Indicators of profitability of a cash flow in the considered period decreased. For example, in 2013 the coefficient of profitability of a pure cash flow made 0,003, i.e. is 0,041 less, than in 2012. The coefficient of profitability of a positive cash flow in 2013 made 0,006 that is 2,2% less, than in 2012. Considerably also the coefficient of profitability of average size of money – with 0,689 to 0,161 decreased. As the generalizing indicator the effectiveness ratio of a pure cash flow which in 2013 in comparison with 2012 increased on 1,688 (2,330 - 0,642) was used. It means that in 2012 cash flows were less effective, and in 2013 efficiency of cash flows increased. As a result of the carried-out analysis it is revealed that in general money is used inefficiently. For more effective use of money it is necessary to correct more precise-ly management of cash flows that will allow not to allow excessive accumulation of money and to formation of their deficiency in separate temporary intervals. Effectively to operate cash flow, it is necessary to know, what its size for this or that period of time, what its basic elements, and what

4.3. Factorial analysis of cash flows

99

kinds of activity of the organi-zation they are formed. The received conclusions can often be confirmed or dis-proved by the comparative analysis with use of a cash flow for a number of the pe-riods. So, analyzing the growing, profitable organization, many right there conclude that the organization prospers (that is in most cases fair). However, rapid growth, even accompanied with receiving profit, is capable to result in insolvency as the need of the organization for working capital can exceed its internal financial opportunities, and need for external financing – its ability to loan. 4.3. Factorial analysis of cash flows In the course of carrying out the analysis of cash flows the special attention is paid to the factorial analysis, that is quantitative measurement of influence of various objective and subjective factors (reasons) making direct or indirect impact on change of profitability, efficiency of use of funds of the organization in the analyzed period. The factorial analysis (determined and stochastic) is carried out with use of various methods of modeling of factorial systems. The factorial analysis of cash flows allows to define influence of various factors of financial and economic activity of the organization on a pure cash flow. He helps to find negative tendencies in time and in due time to take adequate measures for prevention of possible negative financial consequences. All factors influencing formation of cash flows can be divided on external and internal. Treat external factors: environment of the commodity and financial markets, system of the taxation of the organizations, established practices of crediting of suppliers and buyers of production (rule of a business conduct), system of implementation of settlement operations of economic entities, availability of external sources of financing (credits, loans, target financing). It is necessary to distinguish a stage of life cycle at which there is an organization, duration of operational and production cycles, sea-

100

4. Coefficient analysis of cash flows

sonality of production and realiza-tion of goods and services, depreciation policy, urgency of investment programs, personal qualities and professionalism of a key element of the organization from internal factors. Factorial models allow to open, quantitatively to measure, analyse relationships of cause and effect between various indicators which are comprehensively describing economic activity of the organization. Besides, by means of factorial modeling expected (planned) indicators are formed, including the optimum sizes of cash flows of the organization answering the purpose of achievement of maximum efficiency of financial and economic activity at the adequate level of financial risk are defined. Action of factors which are expressed by the indicators which are composed an indicator «Receipt of money» causes directly proportional change and the receipt volume, and size of a pure cash flow. Action of factors which are expressed by the indicators which are composed an indicator «Leaving of money» causes directly proportional change of volume of use of money, but inversely proportional change of size of a pure cash flow. At an action assessment for the sum of a pure cash flow of the factors defined by specification of the income from product sales that is indirect, it is necessary to con-sider two moments. First, indicators by which indirect factors are expressed, are formed by the prin-ciple of charge, and added doesn’t mean the really executed. Therefore the increase in those indicators which reflect the sums to receipt, means reduction of the final and pure remains of money in the studied period because of a delay of real receipt of these means, but their increase in the future and vice versa is possible. Secondly, the factors expressed by the factorial indicators defining profit (loss) to the taxation influence cash flows of the organization through income tax. Therefore change of a pure cash flow due to action of these factors is disproportionate. The factors influencing a deviation of a pure cash flow from net profit can be di-vided into two groups:

4.3. Factorial analysis of cash flows

101

1) defining net profit; 2) defining a pure cash flow. Both in that and in other group it is possible to allocate two more subgroups: –– the factors having direct dependence with the studied indicator; –– the factors having inverse relationship with the studied indicator. One of stages of the factorial analysis of cash flows – calculation of influence of factors on change of size of coefficient of profitability of a positive cash flow. Modeling this coefficient by means of methods of expansion, lengthenings and reductions it is possible to receive sixfactorial system: Cp.cf.pos = [(1 - х1 - х2 - х3) • х4 • х5] / х6. Values of the considered factors pay off on formulas: х1 = Сс / P; x2 = MI / P; х3 = DFA / P; x4 = P / Aas; х5 = Mn.b / CFpos; x6 = Mn.b / Aas. The first three factors – the indicators which are in inversely proportional depen-dence with profitability as decrease in relative level of an expense of capacity of pro-duction and product sales really has on it positive impact. The fourth factor – turnover of short-term assets, has to stimulate undoubtedly processes of effective business, including monetary turn. The fifth and sixth factors - shares of the average rest of money in the total amount of a positive cash flow and assets – reflect the level of efficiency of operating activities of the organization, its ability to generate excess money supply for further use on expansion of scales of business, investment activity. Basic data for calculation of influence of six factors on a productive indicator (profitability coefficient) are given in table 17.

102

4. Coefficient analysis of cash flows

Basic data for the factorial analysis of cash flows Indicators Proceeds from sales of production, thousand tenges Compensation with charges, thousand tenges Material inputs, thousand tenges Depreciation charges, thousand tenges Average size of assets, thousand tenges Average rest of money, thousand tenges Positive cash flow, thousand tenges

Table 17

2012

2013

Change (+, -)

54444

45232

-9212

8488

4140

-4348

31580

15408

-16172

1068

520

-548

31212

61976

+30764

892

-1216

-2108

6296

22292

+15996

Salary capacity

0,156

0,091

-0,065

Material capacity

0,580

0,341

-0,239

Depreciation capacity

0,020

0,011

-0,009

Turnover of assets

1,744

0,730

-1,014

Share of the average rest of money in the total amount of a positive cash flow

0,142

-0,054

-0,196

Share of the average rest of money in the total amount of assets

0,028

-0,020

-0,048

Coefficient of profitability of a positive cash flow

2,158

1,098

-1,060

We will carry out the factorial analysis of coefficient of profitability of a positive cash flow. We will determine influence of factors on it a salary of capacity, a material capacity, turnover of the capital, a share of the average rest of money in a positive cash flow and shares of the average rest of money in the total amount of the capital by way of chain substitutions.

4.3. Factorial analysis of cash flows

103

Calculation of influence of factors on change of coefficient of profitability of positive cash flows in 2013 in comparison with 2012: Cp.cf.pos2012 = [(1 - х1.2012 - х2.2012 - х3.2012) · х4.2012 · х5.2012] / х6.2012 = [(1 - 0,156 - 0,580 - 0,020) · 1,744 · 0,142] / 0,028 = 2,158; Cp.cf.pos1 = [(1 - х1.2013 - х2.2012 - х3.2012) · х4.2012 · х5.2012] / х6.2012 = [(1 - 0,091 - 0,580 - 0,020) · 1,744 · 0,142] / 0,028 = 2,733; Cp.cf.pos2 = [(1 - х1.2013 - х2.2013 - х3.2012) · х4.2012 · х5.2012] / х6.2012 = [(1 - 0,091 - 0,341 - 0,020) · 1,744 · 0,142] / 0,028 = 4,847; Cp.cf.pos3 = [(1 - х1.2013 - х2.2013 - х3.2013) · х4.2012 · х5.2012] / х6.2012 = [(1 - 0,091 - 0,341 - 0,011) · 1,744 · 0,142] / 0,028 = 4,926; Cp.cf.pos4 = [(1 - х1.2013 - х2.2013 - х3.2013) · х4.2013 · х5.2012] / х6.2012 = [(1 - 0,091 - 0,341 - 0,011) · 0,730 · 0,142] / 0,028 = 2,062; Cp.cf.pos5 = [(1 - х1.2013 - х2.2013 - х3.2013) · х4.2013 · х5.2013] / х6.2012 = [(1 - 0,091 - 0,341 - 0,011) · 0,730 · (-0,054)] / 0,028 = -0,784; Cp.cf.pos2013 = [(1 - х1.2013 - х2.2013 - х3.2013) · х4.2013 · х5.2013] / х6.2013 = [(1 - 0,091 - 0,341 - 0,011) · 0,730 · (-0,054)] / (-0,020) = 1,098. Thus, decrease in coefficient of profitability of cash flows on 3,247 points [-1,086 - 2,161)] was result of influence of the following factors: а) salary capacity ΔCp.cf.pos (х1) = Cp.cf.pos1 - Cp.cf.pos2012 = 2,733 - 2,158 = = 0,575; b) material capacity ΔCp.cf.pos (х2) = Cp.cf.pos2 - Cp.cf.pos1 = 4,847 - 2,733 = 2,114; c) depreciation capacity ΔCp.cf.pos (х3) = Cp.cf.pos3 - Cp.cf.pos2 = 4,926 - 4,847 = 0,079; d) turnover of assets

104

4. Coefficient analysis of cash flows

ΔCp.cf.pos (х4) = Cp.cf.pos4 - Cp.cf.pos3 = 2,062 - 4,926 = -2,864; e) share of the average rest of money in the total amount of a positive cash flow ΔCp.cf.pos (х5) = Cp.cf.pos5 - Cp.cf.pos4 = -0,784 - 2,062 = -2,846; f) share of the average rest of money in the total amount of assets ΔCp.cf.pos (х6) = Cp.cf.pos2013 - Cp.cf.pos5 = 1,098 - (-0,784) = = 1,882. In total 1,060 points. Apparently from calculations, influence of the factors included in analytical model was both positive, and negative. Factors of a salary capacity, a material capacity, a depreciation capacity, a share of the average rest of money in the total amount of assets are positive to number of the affected factors on change of coefficient of profitability of cash flows in 2013 in comparison with 2012. Factors of turnover of assets and share of the average rest of money in the total amount of a positive cash flow are negative to number of the affected factors on change of coefficient of profitability of cash flows in 2013. In particular, decrease in turnover of assets on 1,014 points, lowered coefficient of profitability of cash flows on 2,864 points. Thus, factorial models allow to open, quantitatively to measure, analyse relation-ships of cause and effect between various indicators which are comprehensively de-scribing economic activity of the organization. Besides, by means of factorial model-ing expected indicators are formed, including the optimum sizes of cash flows of the organization answering the purpose of achievement of maximum efficiency of eco-nomic activity at the adequate level of financial risk are defined. Control questions 1. In what essence of the coefficient analysis? 2. What coefficient pays off in the course of the analysis of synchronism of for-mation of cash flows? 3. How liquidity coefficients are defined? 4. What shows solvency coefficient?

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105

5. What coefficients of profitability are defined in the analysis of efficiency of cash flows? 6. In what a main goal of the analysis of cash flow? 7. What coefficients are studied within the analysis of efficiency of cash flows? 8. In what essence of the factorial analysis? 9. What purposes and tasks of the factorial analysis? 10. What represents the determined factorial analysis? 11. What represents the stochastic factorial analysis? 12. How it is possible to divide the factors influencing formation of cash flows? 13. What it is necessary to study to gain an impression about real cash flow in the organization? 14. How to define coefficient of turnover of money in the organization? 15. What it is possible to carry to external factors? 16. What factors belong to the internal? 17. What opportunities factorial models possess? 18. What it is necessary to consider at an action assessment for the sum of a pure cash flow of factors? 19. How it is possible to classify the factors influencing a deviation pure cash flow from net profit? 20. What technology of the factorial analysis in the way of chain substitutions? Tests 1. Effectiveness ratio of use of money is: a) profit relation to the cost of property of the organization; b) the relation of a pure cash flow on operating activities to the size of a negative cash flow on operating activities of the organization; c) relation of proceeds from sales to a pure cash flow of the organization. 2. Testifies to activity of investment activity of the organization: a) negative value of a pure cash flow on investment activity; b) positive value of a pure cash flow on investment activity; a) positive value of a pure cash flow on financial activity.

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3. What from the given reduces the size of net profit when determining a pure cash flow from operating activities?: a) expenses on depreciation; b) increase in receivables; c) reduction of stocks; d) reduction of accounts payable; e) the written-off receivables; e) the written-off accounts payable. 4. What factors promote increase in a pure cash flow on operating activities?: a) increase in investments; b) increase in disinvestment; c) increase in financing; d) financing reduction. 5. On the basis of data on what cash flows the effectiveness ratio of cash flows is estimated?: a) only the gross; b) only the pure; c) gross and pure. 6. At calculation of coefficient of Biver the indicator is used: a) cumulative pure cash flow; b) a pure cash flow on operating activities; c) active self-financing; d) hidden financing. 7. Call a veracious statement: a) the financial cycle is part of an operational cycle; b) the operational cycle is part of a financial cycle; c) the financial cycle doesn’t depend on an operational cycle. 8. How to calculate a financial cycle?: a) Receivables turn period + accounts payable turn Period; b) Receivables turn period - the accounts payable turn Period; c) The period of a turn of stocks + receivables turn Period - the accounts payable turn period; d) An operational cycle - the accounts payable turn Period.

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9. Increase in duration of the period of finding of means in advance payments of buyers: a) increases a credit cycle; b) reduces a credit cycle; c) doesn’t influence a credit cycle. 10. Increase in need for additional financing of operating activities; a) it is connected with reduction of a credit cycle; b) it is connected with increase in a credit cycle; c) it isn’t connected with change of a credit cycle. 11. What of indicators are used by a formula of calculation of the current financial requirements on the basis of data of balance?: a) assets; b) short-term assets; c) fixed assets; d) money; e) short-term credits and loans; e) long-term credits and loans. 12. At write-off on financial results of receivables claimed taxable profit: a) increases; b) decreases; a) doesn’t change. 13. How the reserve under depreciation of financial investments is reflected in the balance sheet?: a) increases the sum of financial investments; b) reduces the sum of financial investments; c) increases the sum of the reserve capital; d) reduces the sum of the reserve capital. 14. The average term of a turn of receivables is determined by a formula: a) Number of days in the period / the Average size of receivables; b) Number of days in the period / Coefficient of turnover of receivables;

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c) Average size receivables / Number of calendar days in the period. 15. Join in article of balance «Accounts payable»: a) the advance payments received; b) the advance payments issued; c) bills to receiving; d) bills to payment.

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5. INTEGRATED ANALYSIS OF CASH FLOWS

5.1. Du Pont system analysis of cash flows The Du Pont system of the analysis of cash flows developed by Du Pont firm (USA) provides decomposition of an indicator «coefficient of profitability of money2 on a number of the private financial coefficients of its formation interconnected in uniform system. It is possible to tell that profitability of assets - the indicator derivative of revenue. Profitability of assets can increase at invariable profitability of realization and the growth of volume of product sales advancing increase in cost of assets, that is acceleration of turnover of assets (resource return). To the contrary, at an invariable resource return profitability of assets can grow and due to growth accounting (to the taxation) profitability. Whether has value for an assessment of financial and economic activity of the or-ganization, at the expense of what factors profitability of assets grows or decreases? Certainly, has. Because at the different organizations possibilities of increase in vo-lume and increase of profitability of product sales aren’t identical. Profitability of realization can be increased by price increase or decrease in ex-penses. However these ways temporary are also insufficiently reliable in present con-ditions. The most consistent policy of the organization answering to the purposes of strengthening of a financial position consists in increasing production and realization of that production which is defined by improvement of market conditions. The theory of the financial analysis contains an assessment of turnover and profitability of assets on its separate components: turnover and profitability of material current assets, means in calculations, own and loan sources of means. However, these indicators in itself are a little informative. Purely arithmetically, as a result of reduction of denominators at calculation of these indicators for comparison with a 109

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denominator of an indicator of profitability or turnover of all assets, we have higher profitability and turnover of separate elements of the capital. In the analysis of economic profitability, certainly, it is necessary to take a role of its separate elements into account. But it is expedient to build dependence not through turnover of elements, and through an assessment of structure of the capital in coordination with dynamics of its turnover and profitability. Therefore Du Pont is the cornerstone of system the concept according to which coefficient of profitability of money represents work of coefficient of profitability of product sales on coefficient of turnover of money: Cpm.as = Cp.ps · Ctm.as. From where it is visible that the reasons of deterioration of profitability of money can lie both in decrease in profitability of realization, and in reduction of turnover of money. Investigating this ratio, for the further profound analysis it is possible to define extent of influence of each of elements. Considering its dynamics, it is possible to define the moment of deterioration of a tendency of its change and to track what of the indicators making it led to such change. Thus, it is possible to reach the initial reasons of deterioration of a situation and to try to change it to the best. For the integrated analysis of efficiency of use of funds of the organization the following three-factorial model of Du Pont can be used: Cpm.as = (NP / Mas) = (NP / P) · (P / ОСср) · (ОСср / Mas). If as a result of the analysis of financial statements it is established that the net profit falling on money decreased, it becomes clear, at the expense of what factor it occurred: –– decrease in net profit by each tenge of proceeds from sales of production; –– less effective management of money (delay of their turnover) that leads to de-crease in proceeds from sales of production; –– changes of structure of the advanced capital (financial leverage).

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Example: 2012: net profit - 626 thousand tenges; proceeds from sales of production - 10099; the average size of own capital - 10286; the average size of money – 720 thousand tenges. 2013: net profit - 148 thousand tenges; proceeds from sales of production – 12568; the average size of own capital – 13226; the average size of money – 920 thousand tenges. For calculation we use a way of chain substitutions: 2012 Cpm.as = (626/10099) · (10099 / 10286) · (10286 / 720) · 100 = 86,9%; 2013 Cpm.as = (148/12568) · (12568 / 13226) · (13226 / 920) · 100 = 16,1%. In particular: 1) decrease in net profit was resulted by falling of profitability of money for-70,4% (16,5 - 86,9): ΔCpm.as = (148/12568) · (10099 / 10286) · (10286 / 720) · 100 = 16,5%; 2) delay of turnover of the own was resulted by decrease in profitability of money by-2,8% (84,1 - 86,9): ΔCpm.as = (626/10099) · (12568 / 13226) · (10286 / 720) · 100 = 84,1%; 3) as a result of increase in money the profitability gain for 0,6% is received (87,5 - 86,9): ΔCpm.as = (626/10099) · (10099 / 10286) · (13226 / 920) · 100 = 87,5%. The interfaced influence of three factors equally: ΔCpm.as = -70,4 - 2,8 + 0,6 =-72,6% ≈ -70,8% (16,1 - 86,9). 5.2. SWOT analysis system of cash flows The name of system of SWOT analysis represents an abbreviation of initial let-ters of the terms characterizing objects of this analysis: S – STREHGTHS (strengths of the organization); W – WEAKNESSES (weaknesses of the organization); O – OPPORTUNITIES (possibili-

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ties of development of the organization); T – TREARS (threats to development of the organization). SWOT analysis investigates character strong and weaknesses of the organization regarding opportunities of effective formation of cash flows, and also positive or negative influence of separate external (exogenous) factors on conditions of their development in the forthcoming period. Results of SWOT analysis are represented usually graphically on complex research of influence of separate factors on formation of cash flows of the organization. Problems of SWOT analysis: –– to reveal strong and weaknesses in comparison with competitors; –– to reveal opportunities and threats of environment; –– to connect strong both weaknesses with opportunities and threats; –– to formulate the main directions of development of the organization. It is necessary to remember constantly that strong and weaknesses are internal as-pects, and opportunities and threats are external aspects of the market environment. At an assessment strong, weaknesses of the organization, its opportunities and threats usually: –– first, the GETS analysis is carried out (abbreviation from capital letters of words: Governmen, Economy, Technology, Society), that is tendencies of environment are considered from the point of view of influence of all these components. In other words the external analysis, besides an assessment of market conditions, has to cover such spheres as economy, policy, technology, world situation and welfare behavior, that is to be carried out according to the GETS model; –– secondly, the matrix that does possible carrying out the cross analysis is under construction. SWOT are analyzed not in a separation, separately, and in a combination. For example, as the organization by the strengths can compensate threats of en-vironment: S - O, S - T; W - O, W - T;

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–– thirdly, the formalized assessment through system of the weighed coefficients that allows to achieve the most objective results is applied. As SWOT analysis doesn’t contain economic categories in a general view, it can be applied to any objects and in the most different types of activity. Undoubtedly, it belongs and to the analysis of cash flows. After all money is a basis of any business. Strengths of the organization of rather cash flows is: –– well developed system of target parameters of management of cash flows; –– the worked functional strategy; –– adequate financial resources; –– increase in growth rates of gross monetary inflow; –– real decrease in gross monetary outflow; –– achievement of an optimum ratio of volumes of monetary inflows and outflows; –– providing a minimum level of monetary assets and their equivalents in relation to the volume of product sales; –– optimum pure cash flow; –– perhaps limit share of the loan monetary capital; –– increase of level of liquidity of assets, objects of real investment or portfolio of financial investments; –– effective reinvestment of temporarily free money. Weaknesses of the organization is an absence something important for functioning of the organization or that it isn’t possible to realize in comparison with other organizations yet and puts the organization in adverse situation. It is possible to give too narrow range of products, bad reputation of the organization as an example of weaknesses in the market, a lack of financing, low level of service, the outdated equipment, the unskilled personnel. If to stop on more private examples of the organization of cash flows, it: –– life cycle of the organization on recession; –– increase in duration of an operational and financial cycle at invariable specialization;

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–– –– –– –– –– –– –– ––

seasonality of production and product sales; inefficient depreciation policy; lack of money for financing of necessary changes in strategy; over expenditure of money; payment of penalties; payment of surtaxes and collecting; loss of the monetary and equated to them means; short-reception or non receipt of means from the planned sources, because of debts and non-payments; –– the financial mentality of owners and managers which isn’t answering to real time. Market opportunities are favorable circumstances which the organization can use for obtaining advantage. It is possible to give deterioration of positions of competi-tors, sharp increase in demand for the made production, emergence of new produc-tion technologies of production, growth of level of the income of the population, etc. as an example of market opportunities. It should be noted that opportunities from the point of view of SWOT analysis are not all opportunities which exist in the market but only what the organization can directly use. In particular it: a stable political and economic situation, the developed financial infrastructure, a favorable environment of the financial and share markets, progressive system of the taxation. When determining opportunities and threats, it is necessary to define at what val-ues of opportunity and threat are opportunities and threats. That is, it is necessary to consider that below a certain standard value opportunity becomes threat. Market threats are events which approach can make an adverse effect on the or-ganization. Among them: –– instability of a political and economic situation; –– expensive legislative requirements; –– growth of taxes; –– adverse conditions of the commodity and share markets; –– inaccessibility of the financial credit; –– impossibility of attraction of financial resources of gratuitous target financing;

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–– non-execution of contracts by suppliers and contractors; –– entry into the market of new competitors; –– change of requirements and tastes of buyers; –– the centralized reduction of prices; –– inflation - depreciation of tenge. The assessment strong and weaknesses of the organization in relation to opportunities and threats of environment just also defines existence at the organization of strategic prospects and possibility of their realization. It is clear that there will be thus obstacles (threat) which need to be overcome. From here reorientation of methods of management of development of the organization from a support on already reached results, the mastered production and the used technologies (internal factors) on studying of the restrictions imposed by the external market environment (external factors) follows. Formation of system of main objectives of the organization of cash flows has to take place taking into account desirable and undesirable tendencies of development of productive indicators of cash flows. The system of these purposes should be formulated accurately and briefly, reflecting each of them in concrete values. As the most important target parameters of the organization of cash flows can be established: –– growth rate of the general gross positive cash flow in the considered prospect; –– a ratio of positive and negative cash flows from operating, investment and financial activities; –– a ratio of volumes of attraction of monetary resources from own and loan sources; –– the minimum rate of a gain of a pure cash flow from operating activities; –– the maximum permissible risk level connected with formation and distribution of monetary resources; –– maximum duration of a cycle of a monetary turn; –– maximum duration of production and all operational cycle of the organization;

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–– a minimum level of monetary assets and their equivalents in relation to the vo-lume of product sales; –– maximum period of payback of real investment projects; –– the limit cost of the attracted monetary capital; –– limit share of use of loan money in economic circulation; –– limit of liquidity of objects of real investment or portfolio of financial invest-ments. So, the matrix of SWOT analysis represents the convenient tool of the structural description of strategic characteristics of the environment and the organization. At creation of a matrix it is applied, the so-called dichotomizing procedure used in many fields of knowledge (philosophy, mathematics, botany, informatics, etc.). Then elements of a matrix represent «dichotomizing couples» (couple of mutually excluding each other of signs) that allows to reduce entropy of interaction of the environment and system at the expense of the description of a situation in a general view. At the same time SWOT analysis contains the main shortcoming in the general and developed form. SWOT analysis belongs to group of so-called instructive and descriptive models of the strategic analysis which show only the general direction, and needs to define and select a specific goal each subject and object separately. Except the designated shortcoming, there are also other aspects which are that SWOT analysis doesn’t give the answer to the following questions: 1. What will be if expectation isn’t met by opportunities? 2. What will be if it is absolutely unexpected and unpredictable there will come threats and risks with which it will be impossible to struggle? 3. What will be if competitors strengthen the positions and will weaken strengths of the organization? 4. What will be if weaknesses become weaker? 5. How in a matrix of SWOT to analyze risks? SWOT analysis is carried out to some stages: The stage 1 - begins with collecting reliable analytical information. Successful and effective business assumes continuous possession of

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necessary data on tendencies of the market, activity of competitors, suppliers, etc. In this case SWOT analysis allows to use competently information for definition of strategy and further behavior, presenting the available information in the schematic form where all above categories consist in logically coordinated interaction. The stage 2 - is carried out the step-by-step analysis internal and environment, come to light strong and weaknesses of the organization. The internal environment of the organization is a potential which is a source of its activity though can also become a source of problems if doesn’t provide functioning up to standard. The analysis of the internal environment of the organization opens reserves which can be used for achievement of goals in competitive fight: resources of the organization, its business processes, competitiveness are estimated. When forecasting the financial future of the organization it is necessary to have expanded idea of its financial position (for example, of maintenance of liquidity and ensuring profitability, investment appeal, ensuring effective use and cash flow, etc.). One part of SWOT analysis is connected with research strong and weaknesses of the organization. Thus those achievements and features which give additional opportunities are considered as strengths of the organization. Weaknesses of the organization is a lack of any important components for functioning of the organization or in what lag in comparison with other organizations (competitors) is noted. Weaknesses demand the serious relation and special attention from the management which has to make a maximum of efforts that to get rid of them. After all only those indicators which belong to factors of the internal environment, can be operated. The most part of information on internal state of the organization is well-known, and in this case SWOT helps to bring an order in its judgment. Much more difficult affairs with the description of nonmaterial elements - brands, quality of service, loyalty of the personnel, etc. are. At their discussion it is very important to have results at least of the smallest researches. One of ways of weighing strong and weaknesses of the organization is comparison with competitors. In the presence of necessary data

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such comparison will allow to make the description of own merits and demerits, to define their ponderability, and then to reveal positions, distinctive from competitors, which will be the basis for development of optimum strategy. Each organization exists not in itself, and works in a certain environment with which closely interacts. For the modern environment high degree of dynamism, uncertainty with a big share of riskiness that is connected with a saturation of the market at an aggravation of competitive fight is characteristic. In these conditions for a survival and further development of the organization continuous studying and fast response to changes in environment, ability to timely adaptation are required. Obviously, as the organization has impact on Wednesday, changing it (for example, when releasing a new type of production, when using new technologies, etc.). Respectively, the following part of SWOT analysis is directed on studying of factors of environment. Environment of the organization is a source of the resources necessary for maintenance of internal reserves of the organization up to standard, and the consumer of its finished goods. However resources of environment are limited and are object of claims of a great number of other subjects of business acting in the same environment. At shortage of necessary resources the capacity of the organization is weakened that can entail for it negative consequences. Factors and conditions which the organization can’t influence but which negatively or positively influence its activity belong to environment. Environment can be divided into a macroenvironment (the environment of indirect influence) and a microenvironment (the environment of direct interaction). The macroenvironment creates the general living conditions of the organization in environment (political and legal, technical and economic, welfare, ecological and similar factors which can affect a production activity), and their organization has to consider simply. On a microenvironment (buyers, suppliers, competitors, creditors, shareholders) the enterprise somewhat can affect. Favorable market conditions which can increase advantages of the organization, belong to category of opportunities. All opportunities

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which aren’t existing in the market, but only what the organization can use are actual for SWOT analysis. Opportunities can be both priority, and unpromising. It is more expedient to consider the opportunities opening not only before the concrete organization, but also before her competitors in the same market. Threats are the factors making negative impact on the organization. For the different organizations the same factor can be both threat, and opportunity. For example, if the competitor outstripped in use of opportunity, it can pass for the estimated organization into the category of threats. Or on the contrary, if a certain threat is successfully eliminated, and the competitor didn’t cope with it, it gives to the estimated organization the additional merits supporting its strength. Respectively, forces and weaknesses can pass into the contrast depending on perception of consumers. In time, while the organization goes to achievement of goals and realization of the strategy, estimated weaknesses can be transformed to impressive threats. More visually the structure of SWOT analysis is presented in table 18. Structure of SWOT analysis

 

Internal environment Strengths Finance, production, (S) organization of Weaknesses management, marketing, (W) human resources, organizational culture

Table 18

External environment Opportunities International, (O) political, economic, legal, market, Threats technological, (T) social, competitive, ecological and other types of factors

Thus, procedure of SWOT analysis consists in transfer strong and weaknesses, opportunities and threats. The concrete maintenance of each group of external and internal factors is defined by specifics of branch and features of activity of the organization. Therefore they can

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be added with the characteristics peculiar for a concrete situation in which the organization works (each SWOT is unique). It is necessary to be careful of temptation of drawing up too long lists strong and weaknesses, opportunities and threats, differently there is a situation of an opaque, uncertain strategic picture. It is enough to catch key indicators. The approximate circle of the characteristics, potential risks and opportunities which are most often included in SWOT analysis is presented in table 19. Key indicators of SWOT analysis Strengths (S) – exclusive competence and experience – access to unique resources – scientific potential – existence of the advanced patented technology and the modern equipment – rational financial resources – high qualification of the personnel – high quality of products and high level of service – popularity of a trademark – effective price policy, etc. Opportunities (O) – deterioration of positions of competitors – sharp increase in demand for a product in regions – emergence of new production technologies – growth of level of the income of the population – weakening of the competition – expansion of the range of production, etc.

Table 19

Weaknesses (W) – too narrow product range – bad reputation of the organization in the market – lack of financing – low level of service – remoteness of suppliers – inefficient use of resources – noncompetitive level of expenses – outdated equipment, etc. Threats (Т) – toughening of legislative regulation – entry into the market of new competitors – growth of taxes – delay of growth of the market – change of needs of buyers – transition of suppliers to aggressive credit policy – reduction of volumes of crediting, growth of interest rates for the credits, etc.

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The stage 3 - after is made the concrete list strong and weaknesses of the organization, opportunities and threats, from the received four lists the most significant factors are allocated and connection between them is established. At this stage SWOT matrix for comparison of factors internal and environment (tab. 20) is formed. Table 20

SWOT analysis matrix

Strengths 1. 2. 3. Weaknesses 1. 2. 3.

Opportunities 1. 2. 3. S/O

Threats 1. 2. 3. S/T

W/O

W/T

Procedure of drawing up such confrontational matrix is in detail worked in economic literature. It is sometimes offered to make separately matrixes of opportunities and a matrix of threats for determination of their importance and need of studying. Some analysts suggest to use a digital assessment with assignment in the expert way to each factor of the certain weight connected with probability of approach of an event, strengthening of the importance of a factor or the importance of a factor in the opinion of consumers. Then the coefficient received as a result of work of an assessment and weight is calculated. The coefficient is necessary to coordinate the available factor force to probability of its approach. For example, the scale of an assessment of scales 0 - 10 is applied. Opportunity «Leaving from the market of the main competitor» is recognized very essential (an assessment 10) but as ruin of the competitor is improbable (weight 0,01), the factor turns in little significant (0,1).

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Most of experts pay attention to the qualitative analysis according to which in fields of a matrix are noted: –– the strengths helping to use opportunities with the maximum benefit; –– the strengths allowing to resist effectively to threats; –– the weaknesses limiting possibilities of the organization; –– the weaknesses aggravating negative conditions for the organization. Factors are brought in the corresponding headings of lines and columns on decrease of force of a factor and on probability of approach. In table cells on crossing of columns and lines four fields for which it is necessary to consider all possible pair combinations are formed and to allocate what have to be considered when developing strategy of the organization: «Strengths – Opportunities» (S/O), «Weaknesses – Opportunities» (W/O), «Strengths – Threats» (S/T), «Weaknesses – Threats» (W/T). Cells with the greatest force of interaction of the most influential factors are studied. Stage 4. That the analysis wasn’t simple ascertaining of the facts, it is necessary to develop actions for the most important factors. At this stage the main actions which are necessary for this or that combination strong and weaknesses, opportunities and threats are defined. Then on the chosen actions it is necessary to make the schedule of realization with definition of the responsible. Proceeding from comparison of characteristics of the environment and the organization, for each of four fields of a matrix the basic strategy which are the weighed and creative solution of key problems get out: (S/O) – is studied the optimistic strategy of behavior in the market which is a reference point of strategic development which consists in use of advantages of the organization to realization of opportunities of environment and extraction from this of benefits; (W/O) – is applied the strategy for internal transformations based on use of the appeared opportunities for overcoming or minimization of the available weaknesses or on minimization of weaknesses of the organization for the purpose of extraction of advantages from external

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opportunities (strategy of the joint organizations, vertical or horizontal integration); (S/T) - strategic actions are directed on use of strengths of the organization for opposition to the threats arising in its external environment, and their neutralization (diversification - development of new production and the markets, integration); (W/T) - these strategy in the conditions close to catastrophic, are connected with attempts to get rid both of weaknesses of the organization, and of external threats (becomes reasonable or concentration on a narrow segment of the market, or leaving from the market). The last considered matrix field, despite a catastrophic nature and even absurdity, reminds caution of use only of optimistic forecasts and plans. Behind the back of heads – the personnel and responsibility for the made decisions and result. After all the situation can change in a root if threats and opportunities behave in not predicted way, weaknesses under the influence of Wednesday will be aggravated and forces will be weakened, and strategy will ruin. In this regard there was a concept «�������������������������������������������������������� ��������������������������������������������������������� Anti-SWOT����������������������������������������������� »���������������������������������������������� helping to analyze risks and to define conditions and actions at which strategy won›t be realized. Thus, SWOT analysis represents the method of expert diagnostics of the environment helping to depict the main tendencies of its change, to predict prospects of activity of the organization, to see alternatives of future development. Successful development of strategy of the organization depends on comprehensive, deep and exact display of interaction of the organization with environment on the basis of the analysis of all available information. Fixing and accumulation of results of the analysis and the decisions made on its basis are necessary for creation of the structured administrative experience. The system of SWOT analysis is quite simple for application, but it quite often promotes emergence of the hasty and senseless conclusions based on irrelevant or unreliable information. The main characteristic mistake when carrying out SWOT analysis consists in substitution of the concepts «internal» and «external». It is necessary to remember that what the organization owns concerns the first and operates (for example, the personnel), and external – a

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condition of labor market. Quite often found mistake is reduction instead of the facts of various opinions, estimates and assumptions. Also often the same facts which especially have a wide zone of influence carry and to positive factors, and to the negative. In order to avoid miscalculations in strategic planning and receiving from SWOT analysis of the greatest advantage it is necessary to adhere to some rules: 1) to define a coverage zone for each SWOT analysis. The general analysis of all company will give the indistinct, generalized and very disputable results. SWOT has to be as much as possible focused and be carried out, for example, for each new market, the geographical territory, the certain product conducting the competitor or groups of buyers; 2) it is impossible to use broad and ambiguous definitions. Lowquality SWOT analysis turns out because of vast statements, decisions and generalizations which mean nothing to consumers and have nature of the realized or planned intentions, is more whole. It is necessary to adhere enough exact facts, these researches and to have proofs in their support, and also not to allow association of several factors; 3) it is necessary to represent accurately distinctions between the internal and external SWOT elements depending on their submission to control of the organization. In the course of the formulation of factors it is impossible to allow substitutions of threats of weaknesses, and also opportunities strengths, and vice versa; 4) strong and weaknesses are defined not on the basis of internal representations of staff of the organization, and from the point of view of vision by their those in the market: buyers, competitors, etc. For determination of the most significant advantages and weaknesses it is necessary to range them on importance degree; 5) objectivity of such analysis can be reached if information from versatile sources is used and SWOT analysis is carried out not by one person, but the group of experts (it is better - by results of market researches); 6) it isn›t necessary to try to list all possible factors not to plunge into uncertainty. It is necessary to be limited only to those circumstances which most strongly influence the organization.

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SWOT analysis during the existence caused not only enthusiastic responses. Despite widespread application, even more often it is exposed to the criticism which isn›t deprived of common sense. Perhaps, such standardized scheme of the analysis suits not all organizations. But first of all pays attention that SWOT analysis belongs to group of so-called instructive and descriptive models of the strategic analysis which show only the general direction, and specific actions need to be defined separately. A certain subjectivity is peculiar to SWOT analysis. Besides, quite often it is called structuring and inventory of the existing information without obtaining productive answers to the questions posed. Therefore simplicity and presentation of this model is deceptive, both quality of information, and criteria of exposure of estimates to factors, both qualification of experts, and the subsequent work of the analysts formulating conclusions and recommendations are important here. The qualitative analysis of activity of the organization consists not only in ascertaining reached, but also in the skillful, considered forecast considering many significant parties of production. 5.3. Object-oriented analysis of cash flows The concept of the object-oriented analysis developed by Modern Soft firm (USA) is based on use of computer technology and a special package of applied programs. A basis of this concept is representation of model of formation of cash flows of the organization in the form of set of the interacting primary financial blocks modeling «classes» of the elements which are directly forming cash flows. The user himself defines system of such blocks and classes proceeding from specifics of economic activity of the organization that according to desirable extent of specification to present all key elements of formation of cash flows to models. After creation of model the user fills all blocks with quantitative characteristics according to reporting information on the organization. The system of blocks and classes can be expanded and deepened in process of change of activities of the organization and

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emergence of more detailed information on process of formation of cash flows. In methodology of the object-oriented analysis one of the basic concepts are the object, object model and a class of objects. As in the object-oriented analysis and design of the software these concepts are very important for systemically logical approach to decomposition, we will give their definitions and explanations. By G. Butch’s definition, the object is something, than it is possible to operate. The object has a state, behavior and identity. The object in methodology of the object-oriented analysis from the point of view of systemology is sign object. The condition of object is characterized by the list (usually static) of all properties of this object and the current (usually dynamic) values of each of these properties. Are among properties of object inherent in it or the characteristics acquired by it doing object by itself. The behavior is how the object works and reacts; the behavior is expressed in terms of a condition of object and transmission of messages. The object model is the set of the fundamental principles which are the cornerstone of the object-oriented analysis, based on the principles of abstraction, encapsulation, a modularity, hierarchy, typing, overlapping and stability. The abstraction is essential characteristics of object which distinguish it from all other objects and accurately define its conceptual borders for the observer. Abstraction – process of identification of abstractions. Encapsulation is a process of association and protection of elements of abstraction which form its structure and behavior. Serves for separation of external obligations of object from its realization. Thus, the abstraction is the sign model containing essential (important within the solved task) properties of object. Besides, the abstraction allows division into components which form a state and behavior of object. For understanding within the system concepts described above important that the object is described by essential characteristics or abstractions which are result of interrelation of components of object. The conclusion is quite admissible that the abstraction has to contain the emergent properties which appeared as a result of interrelation of the encapsulated object components.

5.3. Object-oriented analysis of cash flows

127

The hierarchy is a submission or streamlining of abstractions. Typification – the mechanisms interfering replacement of objects of one type by another or, as a last resort, rigidly limiting such replacement. Overlapping is the property distinguishing active objects from inactive. Parallel object – the active object capable to work in the multiline environment. Objects possess integrity which shouldn’t – and actually, can’t be broken. The object can change a state, behave, cope or become in a certain attitude towards other objects. In other words, properties which characterize object and its behavior, remain invariable. Classes and objects are separate, but closely connected concepts. In particular, each object is a copy of any class; the class can generate any number of objects. In the majority of practical cases classes are static, that is all their features and the contents are defined in the course of compilation of the program. Objects, on the contrary, in the course of implementation of the program are created and destroyed. For an assessment of quality of the classes and objects allocated in system it is possible to offer the following five criteria: gearing, connectivity, sufficiency, completeness, primitiveness. Gearing is defined as degree of depth of communications between separate modules. It is much more difficult to perceive and modify system with strong dependence between modules. Complexity of system can be reduced by reduction of gearing between separate modules. Completeness is meant as existence in the interface part of a class of all characteristics of abstraction. Only such operations which demand access to internal realization of abstraction are primitive. Allocation of classes and objects – one of the most complex challenges of the object-oriented analysis which is carried out in the course of decomposition of key abstractions of program system. Decomposition takes the central place in the object-oriented analysis and design of the software. Object-oriented decomposition is understood as process of splitting system into the parts corresponding to objects of subject domain. Practical application of the object-oriented analysis leads to decomposition at which the world is considered as set of objects, cooperative for ensuring the demanded behavior.

128

5. Integrated analysis of cash flows

Division or decomposition is applied in cases when the existing system is considered or the new is projected. Thus two fundamental concepts of a systemology are applied: analysis and synthesis of systems. Tasks of the analysis are defined as studying of properties and behavior of system depending on its structure and values of parameters, proceeding from the set properties of system; problems of synthesis are reduced to a choice of structure and values of parameters, proceeding from the set properties of system. Now don’t exist formal methods of synthesis of difficult systems. Apparently, it in principle is impossible as difficult system are synthesized for conditions which can’t be described concrete mathematical models owing to continuously changing variety of conditions. Therefore everywhere synthesis through the analysis when some structure of system is set proceeding from practical reasons is put into practice, then it is analyzed, then its parameters change or the structure is modified, then the analysis and so on before achievement of necessary result is carried out. In other words, when developing rather difficult software the synthesis problem by synthesis methods through the analysis is solved. On the one hand, the problem of creation of new structure or a task of the invention of new abstractions is creative, on the other hand, there are general rules helping with this process. We will set in a general view functionality of system effectiveness in the form of the following expression: A = F(a1, a2, a3,…, an). As the explanation of purpose of functionality we will consider a problem of increase in liquidity of a cash flow. Let And – liquidity of a cash flow. The first question which the person solving this problem has to answer – on what depends liquidity of a cash flow? For simplicity we will consider two making elements: positive and negative cash flow. We will mark out the properties having impact on the set system property, for example, in a positive stream – set of receipts of money (let it a), and in a negative stream – set of payments of money (b).

5.3. Object-oriented analysis of cash flows

129

Means, for increase in system quality A it is necessary to consider possibilities of synthesis of such structure of the considered elements at which values of indicators a and b will lead to the demanded result. It is an obvious example of synthesis through the analysis. Of course, for increase in liquidity of a cash flow it is necessary to consider more difficult complex of indicators. And moreover, it is impossible to forget about possible functional dependence of these parameters and about influence of other (unaccounted) parameters. Quite it can appear so that one of unaccounted parameters has a greater influence on the analyzed system quality A. Thus, in a general view the rule of decomposition consists in performance of the following main stages: –– determination of system properties, significant for the solution of an objective; –– search of components of system and their properties having the marked-out system properties solving impact on. Decomposition can proceed until rather simple components of the considered system and its subsystem are allocated. Here «simplicity» – is a subjective indicator, that is each analyst defines for himself as it is long necessary to carry out splitting system and its subsystems into the making elements. The allocated elements and their simplified description in the form of a set of the properties necessary for the solution of an objective are represented not that by others as abstraction. Such approach creates a logical framework of system: structure of classes, representing objects of real system in the set abstraction. On the subsequent phases of the analysis, the attention switches to internal behavior of key abstractions and mechanisms, and also their physical representation. The decisions made in the course of the analysis set architecture of system, architecture of processes and architecture of modules. Control questions 1. What is the cornerstone of Du Pont system of the analysis of efficiency of cash flows? 2. In what essence of model of Du Pont?

130

5. Integrated analysis of cash flows

3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20.

What does the three-factorial model of Du Pont represent? What does SWOT abbreviation mean? What is the main content of SWOT analysis? In what problems of SWOT analysis consist? What events are held at an assessment strong, weaknesses of the organization? In what potential internal strengths of the organization consist? In what potential internal weaknesses of the organization consist? In what potential external opportunities of the organization consist? In what potential external threats of the organization consist? In what the most important target parameters of the organization of cash flows consist? In what SWOT analysis shortcomings consist? What stages are included by SWOT analysis? To what rules it is necessary to adhere when planning SWOT analysis? What is a basis of the concept of the object-oriented analysis? What concepts are the main in methodology of the object-oriented analysis? In what essence of the concepts «object model», «abstraction», «encapsulation», «abstraction»? What criteria are used for an assessment of quality of classes and objects in the object-oriented analysis? What is understood as object-oriented decomposition?

Tests 1. Classification of monetary calculations and payments of the organization is made on signs: a) on objects of monetary operations and forms of implementation; b) on currency of payment and an orientation of cash flow; c) in relation to the enterprise and the period of time; d) in forms of implementation and a type of the used currency. 2. Treat the external factors influencing formation of cash flows: a) monetary relations of the organization with budgets of all levels; b) the monetary relations between head and the affiliated organizations; c) a political situation in the country; d) there is no right answer.

5.3. Object-oriented analysis of cash flows

131

3. Distribution in time of receipts and payments of the economic agent is: a) monetary turn; b) cash flow; c) monetary circulation; d) monetary base. 4. The relation of a positive cash flow to a negative cash flow characterizes: a) balance of cash flows; b) level of sufficiency of volumes of a cash flow; c) liquidity of a cash flow; d) variability of the direction of cash flow. 5. From external sources treat the basic principles of attraction of monetary resources by the enterprise: a) recoverability, availability at a price, urgency; b) availability at a price, efficiency, recoverability; c) efficiency, urgency, availability at a price. 6. By types of economic activity the cash flow is subdivided on: a) a cash flow on structural divisions; b) a cash flow on economic operations; c) operational, financial, investment; d) a cash flow on the enterprise in general. 7. Increase of narrowness of correlative communication between negative and positive cash flows by types activity of the organization is reached in the way: a) uses of system of acceleration delay of a payment turn: b) acceleration of attraction of money in the short-term period; c) acceleration of attraction of money in the long-term period; d) maximizing a pure cash flow. 8. Whenever possible ensuring solvency of firm monetary streams is classified on: a) predictable and not predictable; b) regulated and not adjustable;

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c) liquid and not liquid; d) regular and discrete. 9. Has essential impact on formation of cash flows of the organization for time: a) urgency of investment programs; b) seasonality of production and product sales; c) duration of an operational cycle; d) life cycle of the organization. 10. From operating activities are a part of cash flows: a) target financing and payments in the budget and off-budget funds; b) monetary sales proceeds and acquisition of fixed assets; c) advance payments from buyers and payment of percent for the credit. 11. The credit organized by a pool of creditors for one borrower for financing of large-scale economic programs is called: a) financial leasing; b) call credit; c) revolving credit; d) syndicated loan. 12. Acceleration of an operational cycle of the organization: a) doesn’t influence increase in volumes of cash flows; b) leads to growth of need for money; c) doesn’t influence growth of need for money; d) leads to increase in volumes of cash flows. 13. The provisions of accounting policies reducing profit: a) increase quality of profit; b) lower quality of profit; c) don’t influence quality of profit. 14. The indicator of profitability of assets allows to judge about: a) effective management of assets; b) to structure of profit; c) effective management of expenses; d) speeds of transformation of assets.

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133

15. The analysis of profit based on the resource principle allows to define influence on profit of such factors, as: a) material capacity; b) coefficient of production costs; c) loan capital; d) volume of product sales in real terms.

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LIST OF REFERENCES

1. Timofeeva T.V. Analysis of cash flows of the enterprise. – M.: Finance and statistics, Infra-M, 2010. – 368 p. 2. Sorokina E.M. Analysis of cash flows of the enterprise: The theory and practice in the conditions of reforming of the Russian economy. – Finance and statistics, 2004. – 176 p. 3. Hakhonova N. N. Account, audit and analysis of cash flows of the enterprises and organizations. – M.: Mart, 2003. – 304 p. 4. Bocharov V.V. Financial analysis. – SPb.: St. Petersburg, 2009. – 240 p. 5. Bertonesh M., Knight R. Management of cash flows. – SPb.: St. Petersburg, 2004. – 240 p. 6. Pancakes A.O., Litvinov V.G. Analysis of use of money. – M.: Laboratory of the book, 2010. – 54 p. 7. The analysis of financial statements / Under the editorship of Vakhrushina M.A., Plaskova N.S. – M.: High school textbook, 2007. – 367 p. 8. Sokolov R.S. Analysis of cash flows of the enterprise. – M.: Laboratory of the book, 2009. – 166 p. 9. Kovalyov V.V. Financial analysis: methods and procedures. – M.: Finance and statistics, 2001. – 560 p. 10. Savitskaya G.V. Ekonomichesky analysis. – M.: New knowledge, 2005. – 651 p. 11. Ionova A.F., Seleznyova N.N. Financial analysis. – M.: Prospectus, 2006. – 623 p. 12. Kuznetsova I.D. Management of cash flows of the enterprise: manual. – Ivanova: Ivanovo state chemical and technological university, 2009. – 193 p. 13. Lytnev O.N. Financial management. Cash flows and bases of the marginal analysis: manual. – M.: The Russian state university of Immanuel Kant, 2006. – 230 p. 14. Blank I.A.  Management of cash flows: Studies grant. – To.: Nika Center, Elga, 2002. – 736 p. 15. Kozhevnikova E.A. Forecasting of the financial future on the basis of SWOT analysis//Economical department, 2012, – №10. 16. ZHail Butch, Robert A. Maksimchuk. The object-oriented analysis and design with examples of appendices. – M.: Williams, 2008. – 721 p. 134

Appendices

135

APPENDICES

Appendix 1

Form №1  Balance sheet   as of December 31 ____ years  Assets 1 I. Short-term assets: Money and their equivalents The financial assets available for sale Derivative financial instruments The financial assets considered at fair value through profits and losses The financial assets withheld before repayment Other short-term financial assets Short-term trade and other receivables Current income tax Stocks Other short-term assets Total short-term assets (the sum of lines is 010 on 019)

(thousand tenges)  Code of a For the end For the beginning line reporting period reporting period 2   010

   

011

 

 

012

 

 

013

 

 

014

 

 

015

 

 

016

 

 

017 018 019 100

       

       

135

3

   

4

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Analysis of cash flows of the organization

1 The assets (or the leaving groups) intended for sale II. Long-term assets The financial assets available for sale Derivative financial instruments The financial assets considered at fair value through profits and losses The financial assets withheld before repayment Other long-term financial assets Long-term trade and other receivables The investments considered by method of individual share Investment property Fixed assets Biological assets Prospecting and estimated assets Intangible asset Deferred tax assets Other long-term assets Total long-term assets (the sum of lines is 110 on 123) Balance (line 100 +  line 101 + line 200)

2 101

 

3

  110

   

   

111

 

 

112

 

 

113

 

 

114

 

 

115

 

 

116

 

 

117 118 119 120

       

       

121 122 123 200

       

       

 

 

 

 

4

Appendices

1 III. Short-term obligations Loans Derivative financial instruments Other short-term financial obligations Short-term trade and other creditor debt Short-term reserves Current tax obligations for income tax Remunerations to workers Other short-term obligations Total short-term obligations (the sum of lines is 210 on 217) Obligations of the leaving groups intended for sale IV. Long-term obligations Loans Derivative financial instruments Other long-term financial obligations Long-term trade and other accounts payable Long-term reserves Deferred tax liabilities Other long-term obligations

2

3

4

 

 

 

210 211

   

   

212

 

 

213

 

 

214 215

   

   

216

 

 

217

 

 

300

 

 

301

 

 

 

 

 

310 311

   

   

312

 

 

313

 

 

314

 

 

315 316

   

   

137

138

 

Analysis of cash flows of the organization

1 Total long-term obligations (the sum of lines is 310 on 316) V. Capital Authorized (joint-stock) capital Share premium The redeemed own share tools Reserves Retained earnings (uncovered loss) Total the capital carried on owners of the parent organization (the sum of lines with 410 on 414) Share of not controlling owners In total capital (line 420 +/- line 421) Balance (line 300 +  line 301 +  line 400 + line 500)

2 400

 

3

  410

   

   

411 412

   

   

413 414

   

   

420

 

 

421

 

 

500

 

 

 

 

 

 

4

Appendices

139

Appendix 2 Form №2  Profit and loss report   in a year which is coming to an end on December 31 ____ years  (thousand tenges)  Code of For the For the Name of indicators a line reporting previous period period 1 2 3 4     Proceeds 010 Prime cost of the realized goods and 011     services Gross profit (line 010 – line 011) 012     Selling expenses 013     Administrative expenses 014     Other expenses 015     Other income 016     Total operating profit (loss) (+/- lines 020     with 012 on 016) Income on financing 021     Expenses on financing 022     Share of the organization in profit (loss) 023     of the associated organizations and the joint activity considered on a method of individual share Other not operating income 024     Other not operating expenses 025     Profit (loss) to the taxation (+/- lines with 100     020 on 025) Income tax expense 101     Profit (loss) after the taxation from the 200     proceeding activity (line 100 – line 101) Profit (loss) after the taxation from the 201     stopped activity

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Analysis of cash flows of the organization

1 Profit in a year (line 200 + line 201) carried on: owners of the parent organization share of not controlling owners Other cumulative profit, all (the sum of lines is 410 on 420): including: Revaluation of fixed assets Revaluation of the financial assets available for sale Share in other cumulative profit (loss) of the associated organizations and the joint activity considered on a method of individual share The actuarial arrived (losses) according to pension obligations Effect of change in a rate of income tax on the delayed tax of the affiliated organizations Cash flow hedging Exchange difference on investments into the foreign organizations Hedging of pure investments into foreign operations Other components of other cumulative profit Adjustment at reclassification as a part of profit (loss) Tax effect of components of other cumulative profit General cumulative profit (line 300 + line 400) The general cumulative profit carried on: owners of the parent organization share of not controlling owners

2 300

3  

4  

    400

     

     

  410 411

     

     

412

 

 

413

 

 

414

 

 

415 416

   

   

417

 

 

418

 

 

419

 

 

420

 

 

500

 

 

     

     

     

141

Appendices

Earning per share: including: Basic earning per share: from the proceeding activity from the stopped activity Diluted earnings per share: from the proceeding activity from the stopped activity

600              

               

               

142

Analysis of cash flows of the organization

Appendix 3 Form №3  Report on cash flow (direct method)   in a year which is coming to an end on December 31 ____ years  (thousand tenges)  Name of indicators Code of For the For the a line reporting reporting period period 1 2 3 4 I. Cash flow from operating activities 1. Receipt of money, all (the sum of lines 010 is 011 on 016) including: sales of goods and services 011 other revenue 012 the advance payments received from 013 buyers, customers receipts under contracts of insurance 014 the earned rewards 015 other receipts 016 2. Leaving of money, all (the sum of lines 020 is 021 on 027) including: payments to suppliers for goods and 021 services the advance payments issued to suppliers 022 of goods and services payments for compensation 023 remuneration payment 024 payments under contracts of insurance 025 income tax and other payments in the 026 budget other payments 027 3. The pure sum of money from operating 030 activities (line 010 – line 020)

143

Appendices

1 2 3 II. Cash flow from investment activity 1. Receipt of money, all (the sum of lines 040 is 041 on 051) including: realization of fixed assets 041 realization of intangible assets 042 realization of other long-term assets 043 realization of share tools of other 044 organizations (except affiliated) and share in joint business realization of debt tools of other 045 organizations compensation at loss of control over the 046 affiliated organizations realization of other financial assets 047 future and forward contracts, options and 048 swaps the received dividends 049 the earned rewards 050 other receipts 051 2. Leaving of money, all (the sum of lines 060 is 061 on 071) including: acquisition of fixed assets 061 acquisition of intangible assets 062 acquisition of other long-term assets 063 acquisition of share tools of other 064 organizations (except affiliated) and share in joint business acquisition of debt tools of other 065 organizations acquisition of control over the affiliated 066 organizations acquisition of other financial assets 067 granting loans 068

4

144

Analysis of cash flows of the organization

1 2 future and forward contracts, options and 069 swaps investments into the associated and 070 affiliated organizations other payments 071 3. The pure sum of money from 080 investment activity (line 040 – line 060) III. Cash flow from financial activity 1. Receipt of money, all (the sum of lines 090 is 091 on 094) including: issue of shares and other financial 091 instruments receiving loans 092 the earned rewards 093 other receipts 094 2. Leaving of money, all (the sum of lines 100 is 101 on 105) ncluding: repayment of loans 101 remuneration payment 102 dividend payout 103 payments to owners for stocks of the 104 organization other leavings 105 3. The pure sum of money from financial 110 activity (line 090 – line 100) 4. Influence of exchange rates of 120 currencies to tenge 5. Increase +/- reduction of money (line 130 030 +/- line 080 +/- line 110) 6. Money and their equivalents for the 140 beginning of the reporting period 7. Money and their equivalents for the end 150 of the reporting period

3

4

Appendices

145

Appendix 4 Form №3  Report on cash flow (indirect method)   in a year which is coming to an end on December 31 ____ years  (thousand tenges)  Code of For the For the Name of indicators a line reporting previous period period 1 2 3 4 1. Cash flow from operating activities       Profit (loss) to the taxation 010     Depreciation and depreciation of fixed 011     assets and intangible assets Depreciation of goodwill 012     Depreciation of trade and other receivables 013     Write-off of cost of the assets (or the 014     leaving group) intended for sale at fair value minus costs of sale Loss (profit) on leaving of fixed assets 015     Loss (profit) on investment property 016     Loss (profit) on early repayment of loans 017     Loss (profit) on the other financial assets 018     reflected at fair value with adjustment through the profit and loss report Expenses (income) on financing 019     Remunerations to workers 020     Expenses on remunerations by share tools 021     The income (expense) on the postponed 022     taxes Unrealized positive (negative) exchange 023     difference Share of the organization in profit of 024     the associated organizations and the joint activity considered on a method of individual share Other non-monetary operational corrections 025     of the general cumulative profit (loss)

146

Analysis of cash flows of the organization

1 Total correction of the general cumulative profit (loss), all (+/- lines with 011 on 025) Changes in stocks Changes of a reserve Changes in trade and other receivables Changes in trade and other accounts payable Changes in debt on taxes and other obligatory payments in the budget Changes in other short-term obligations Total the movement of operational assets and obligations, all (+/- lines with 031 on 036) The paid remunerations The paid income tax Pure sum of money from operational activity (line 010 +/-line 030 +/- line 040 +/- line 041 +/- line 042) 2. Cash flow from investment activity 3. Cash flow from financial activity 4. Influence of exchange rates of currencies to tenge 5. Increase +/- reduction of money (line 100 +/- line 200 +/- line 300) 6. Money and their equivalents for the beginning of the reporting period 7. Money and their equivalents for the end of the reporting period

2 030

3  

4  

031 032 033 034

       

       

035

 

 

036 040

   

   

041 042 100

     

     

200 300 400

     

     

500

 

 

600

 

 

700

 

 

Appendices

147

СONTENTS

SYMBOLS.......................................................................................3 PREFACE........................................................................................6 1. THEORY OF THE ANALYSIS OF CASH FLOWS ........................................................................8 1.1. Essence and classification of cash flows...................................8 1.2. Methods and indicators of the analysis of cash flows .............19 1.3. Receptions and analysis stages of cash flows...........................26 2. METHODS OF AN ASSESSMENT OF CASH FLOWS ........................................................................38 2.1. Direct method of an assessment of cash flows..........................38 2.2. Indirect method of an assessment of cash flows ......................48 2.3. Method of a liquid cash flow ...................................................61 3. ANALYSIS OF ABSOLUTE MEASURES OF CASH FLOWS ........................................................................72 3.1. Horizontal analysis of cash flows ............................................72 3.2. Vertical analysis of cash flows..................................................77 3.3. Matrix method of the analysis of cash flows............................80 4. COEFFICIENT ANALYSIS OF CASH FLOWS........................93 4.1. Analysis of liquidity of cash flows............................................93 4.2. Analysis of efficiency of cash flows ........................................97 4.3. Factorial analysis of cash flows ...............................................99 5. INTEGRATED ANALYSIS OF CASH FLOWS........................109 5.1. Du Pont system analysis of cash flows.....................................109 5.2. SWOT analysis system of cash flows ......................................111 5.3. Object-oriented analysis of cash flows ....................................125 LIST OF REFERENCES.................................................................134 APPENDICES.................................................................................135 147

Educational issue Janshanlo Ramzan Esarovich Alimbekova Gaukhar Akylbekovna ANALYSIS OF CASH FLOWS OF THE ORGANIZATION Educational manual Computer page makeup and cover designer: N.M. Bazarbaeva The website used for front-page designing www.syl.ru IS No.9914 Signed for publishing 27.07.16. Format 60x84 1/16. Offset paper. Digital printing. Volume 9,25 printer’s sheet. Edition 70. Order No. 3412. Publishing house «Qazaq university» Al-Farabi Kazakh National University, 71 Al-Farabi, 050040, Almaty Printed in the printing office of the «Qazaq universitty» publishing house