FACULTY OF BUSINESS

ACCOUNTING SCHOOL

ACADEMIC REPORT
CASH-FLOW

COURSE:

FINANCIAL ANALYSIS FOR DECISION -MAKING

AUTHOR:

OSORIO HUAMANI, CHERMELIM OSORIO

TEACHER:

ACOSTUPA HUAMÁN, JUAN JOSÉ

Lima Norte - Perú

(2024)

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INDEX

I. INTRODUCTION: ............................................................................................ 3
II. DEVELOPMENT: ............................................................................................ 3
TYPES OF CASH-FLOW........................................................................................................... 3
Understanding Cash Flow .......................................................................................................... 4
• Determine the percentage of own resources versus external resources for a new
investment or project................................................................................................................... 5
BENEFITS OF CASH FLOW ANALYSIS:.............................................................................. 5
Cash Flow Analysis: .................................................................................................................... 6
Cash flow analysis is crucial to evaluating the financial health of a company and its
ability to generate cash to operate, invest and finance its activities. Below are
methods and techniques to perform this analysis effectively:Métodos de Análisis del
Flujo de Efectivo ...................................................................................................................... 6
Flow Ratios: .................................................................................................................................... 6
III. BIBLIOGRAPHIC REFERENCES ..................................................................... 8

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 I. INTRODUCTION:
Cash flow, also known as cash flow, is a fundamental financial tool that provides a
clear and detailed view of a company's ability to generate and use cash over a
specific period. This tool is essential for assessing the financial health of an
organization, as it allows financial managers and analysts to understand how and
when cash enters and leaves the company. Through this analysis, the sources and
uses of cash can be identified, facilitating the evaluation of crucial aspects such as
liquidity, solvency and the company's ability to maintain its daily operations and meet
its short-term and financial obligations. long term.

Cash flow analysis is also vital for managing working capital, which reflects a
company's operational efficiency and its ability to manage its current assets and
liabilities. A positive cash flow indicates that the company is generating enough cash
to sustain and expand its operations, while a negative cash flow can signal financial
problems that require immediate attention.

II. DEVELOPMENT:

Cash-flow is calculated by adding amortizations and provisions to the net profit. This
is done because both amortization (the permanent depreciation of an asset due to
time and its use) and provisions (occasional depreciation due to an unforeseen
event) do not imply a physical outflow of money, but only an accounting entry of
expenses. In this way, cash-flow allows us to specify the cash that a company can
generate in a given period, and therefore, allows us to measure the capacity of that
company to meet its payments.
TYPES OF CASH-FLOW

Cash flow is one of the most critical components of financial statements, providing
essential information about a company's ability to generate cash and its equivalents.
According to AccountingCoach, LLC (2021), the statement of cash flows is divided
into three main activities:
• Operating or operating cash flow: This includes cash flows related to the
company's main activities, such as income from sales of products or services,
payments to suppliers and employee salaries.

• Cash flow from investment activities: This covers cash flows related to the
investments made by the company, such as the purchase of machinery, real estate
investments and acquisitions.

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• Cash flow from financing activities: This refers to the cash flows generated by
financial activities, such as the payment of loans, distribution of dividends and
issuance of shares.

The U.S. Securities and Exchange Commission (SEC) (2020) highlights that the
statement of cash flows is vital for investors and analysts, as it provides a clear view
of how a company generates and uses its cash. This is especially relevant for SMEs,
where effective cash flow management can be decisive for sustainability and
growth.

Understanding Cash Flow

Cash flow refers to the movement of cash in and out of a company, and is a key
indicator of its financial health. Investopedia (2023) notes that positive cash flow
indicates that a company is generating more cash than it is spending, which is
essential for paying down debt, reinvesting in the business, and providing returns to
shareholders.
Discounted Cash Flows (DCF)
The Corporate Finance Institute (2022) explains that DCF is a widely used valuation
methodology due to its focus on a company's economic fundamentals. The DCF
assessment involves the following key steps:
1. Projection of Future Cash Flows: This stage requires a detailed estimate of future
cash flows, based on assumptions about revenue growth, profit margins and capital
needs.
2. Calculation of Terminal Value: In addition to the projected cash flows, the terminal
value represents the value of the company beyond the projection period. This is
calculated using the perpetual growth model or a market multiple.
3. Discounting of Cash Flows: The projected cash flows and terminal value are
discounted to present value using the appropriate discount rate, usually the WACC.
The DCF is particularly useful for valuing SMEs, as it can be tailored to reflect the
specificities of these companies, including their unique growth rates and capital
structures.What will it allow us if we do the cash flow?
• • Have a clear vision of the future liquidity of our company or group of
companies.
• • Evaluate the viability of meeting the payment commitments acquired.
• • Identify our financing needs or investment possibilities in the coming
periods.
• • Evaluate the financial costs associated with our activities.Simular diferentes
escenarios para estar preparados ante las variables del mercado.

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 • Determine the percentage of own resources versus external
resources for a new investment or project.

BENEFITS OF CASH FLOW ANALYSIS:

• Increased financial efficiency and productivity: Cash flow provides a clear

and detailed view of how funds are generated and used within a company.
This analysis allows companies to improve the management of their financial
resources, optimizing efficiency and productivity in their operational
processes.

• Reduction of response times in decision making: By offering an accurate

picture of the company's financial situation, cash flow analysis allows
managers to make more informed and faster decisions, improving the
company's agility to adapt to changes and opportunities in the market.

• Minimization of financial errors and risks: Constant and detailed monitoring

of cash flow helps identify and correct possible financial errors and mitigate
risks before they become serious problems. This ensures greater accuracy
in financial records and stability in company operations.

• Savings in financial and operational costs: With a clear understanding of

cash flows, companies can better plan their financing needs and optimize
their operating expenses. This can lead to a reduction in costs associated
with external financing and better management of internal resources.

• Improved quality and consistency of financial reporting: Regularity and

accuracy in cash flow analysis ensure that financial reports reliably reflect the
company's economic situation. This increases investor confidence in the
information provided.

• Ability to handle higher volumes of financial transactions: Good cash flow

control allows the company to effectively manage a higher volume of
transactions, facilitating business growth and expansion without
compromising financial stability.

• Reducing risks and improving financial security: Maintaining positive, well-

managed cash flow ensures that the company can meet its financial
obligations on time, reducing the risks of insolvency and improving long-term

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Cash Flow Analysis:
Cash flow analysis is crucial to evaluating the financial health of a company and its
ability to generate cash to operate, invest and finance its activities. Below are
methods and techniques to perform this analysis effectively:Métodos de Análisis del
Flujo de Efectivo

1. Horizontal and Vertical Analysis:

• Horizontal Analysis: This method involves comparing cash flows from

different periods to identify trends and changes over time. For example, you
can compare operating cash flows for the last five years to see if there is an
increasing or decreasing pattern.

• Vertical Analysis: Also known as common financial statement analysis, this

method compares cash flow items to a base figure within the same period.
For example, you can express each cash flow component as a percentage
of total sales for the same period.

Flow Ratios:
• Liquidity Ratios: These ratios measure the company's ability to cover
its short-term obligations with the cash generated from its operations.
• Interest Coverage Ratio (Cash Interest Coverage Ratio): (CFO +
Interest Paid + Taxes Paid) / Interest Paid
• Debt Coverage Ratio: CFO / Short-Term Debt
• Solvency Ratios: They evaluate the company's ability to meet its long-
term obligations.
• Total Capital Coverage Ratio: CFO / (Long-Term Debt + Equity)
• Efficiency Ratios: These ratios measure how the company uses its
cash to generate income.
• Operational Efficiency Ratio: CFO / Net Sales

Examples of Analysis and their Interpretation

1. Horizontal Analysis:

o If operating cash flow has increased from $100,000 to $150,000 in the

last year, this could indicate an improvement in the company's ability
to generate cash from its core operations. This positive trend is a sign
of financial health.
o If, on the other hand, operating cash flow has decreased from
$150,000 to $100,000, this could indicate problems in the company's
operations, which may need further investigation.

2. Vertical Analysis:

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 o If operating cash flow represents 20% of total sales in one period and
25% in the next, this suggests an improvement in the company's
operating efficiency.
o If interest payments represent 5% of CFO in one year and increase to
10% in the next, this could indicate an increase in debt costs, which
could be a red flag.
o 3. Cash Flow Ratios:
o Interest Coverage Ratio: If this ratio is 3, it means that the company
generates enough operating cash to cover interest paid three times,
suggesting a healthy liquidity position.
o Debt Coverage Ratio: A ratio of 2 indicates that the company
generates twice its short-term debt in operating cash, suggesting a
good ability to manage its short-term debt.
o oOperating Efficiency Ratio: A ratio of 15% could indicate that 15% of
net sales are converted to operating cash flow, which can be a good
indication of operational efficiency.

CONLUSION:

Cash flow is an essential tool for the financial management of any company.
Through detailed analysis of cash inflows and outflows, organizations can gain a
clear and accurate view of their liquidity, solvency and ability to generate cash in the
future. Correct interpretation of cash flow allows financial managers to make
informed decisions about daily operations, long-term investments and financing
strategies.

Effective cash flow management helps ensure that a company can meet its financial
obligations, invest in growth opportunities and maintain sustainable operation.
Additionally, cash flow analysis provides critical information for evaluating financial
performance, identifying areas for improvement, and mitigating financial risks.

In short, proper cash flow management not only improves the financial health of the
company, but also strengthens its competitive position in the market. It is essential
that companies, regardless of their size or sector, implement sound cash flow
management practices and use advanced tools and methodologies for analysis and
forecasting. With a deep understanding and proactive management of cash flow,
businesses can ensure their financial stability and position themselves for long-term
sustainable growth.

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III. BIBLIOGRAPHIC REFERENCES

- Boza Pró, G. A. (2021). Modelo de valoración de pymes por descuento de flujo de

fondos: conceptos y criterios utilizados por los “expertos” y valor de empresa en las
pymes peruanas, 2019.

- AccountingCoach, LLC. (2021). Statement of Cash Flows.

- U.S. Securities and Exchange Commission (SEC). (2020). Beginner's Guide to

Financial Statements.

- Investopedia. (2023). Understanding Cash Flow.

- Corporate Finance Institute. (2022). Discounted Cash Flow (DCF).