A cash flow model is an analytical representation that includes all of a company or person's assets, investments, debts, income and expenditures to project each year for the next five years. By cash flow modelling a range of different 'what if' cash flow modelling scenarios and outcomes, we help our clients to understand the importance of planning for their futures. This helps them make better choices and decisions, moving toward fulfilling their dream work/life balance.

What benefits does cash flow modelling provide in business?

Cash flow modelling helps to create more sustainable business operations and forecast. This predictive analysis also increases understanding of what drives the cashflow, leading to better decisions about how much money is needed in advance and making sure you don't run out of money. Modelling helps drive future cash driver target setting, providing a basis for enhanced analysis and reporting of cashflow performance against targets. Modelling also improves understanding of the cash impact when investments are made, as this reduces uncertainty and increases access to capital with rates of growth income and assumed rates of growth.

What is cash flow?

Cashflow is the total amount of money being transferred in and out of a business. Cash received represents inflows while money spent represents outflows. A company’s ability to provide value for shareholders is primarily determined by its ability to generate positive cash flows. Specifically, maximal long-term net free cashflow (FCF) is what a company generates from normal business operations after subtracting any money spent on capital expenditures (Capex).

Cash Flow Categories:

Cash Flow from Operations (CFO):

A company's CFO, or operating cashflow, describes money flows involved directly with the production and sale of goods from ordinary operations. For a company to be financially viable in the long term, there must be more operating cash inflows than cash outflows.

A company's operating cashflow is shown on the statement of cash flows (in which total revenues and expenses for the year are listed), as well as on a quarterly basis. Operating cash flow modelling is an important factor when demonstrating a company's ability to generate enough cash on hand to continue operations and spur growth.

It is important to separate revenue from cash received, as the two have different impacts on your company. For example if you generate a large sale it would be good for your earnings and revenues, but not so much for your cashflow if there was difficulty collecting payment.

Cash Flow models from Investing (CFI)

CFI, or cash flow investment reports the amount of money generated/spent from various investment activities over a period such as purchases of speculative assets, investments in securities, or sale of securities or assets.

Negative cashflow from investing activities could be due to a company's significant spending on long-term projects such as research and development (R&D) or any other project that is looking into the future of the business.

This does not indicate a bad sign for the company, even though they are experiencing negative cash flows.

Cash Flow model from Financing (CFF)

A company's CFF, or financing cashflow, is the net flows of cash that are used to fund the company and its capital. Financing activities include transactions such as issuing debt and equity while paying dividends. Cashflow from financing activities provides investors with insight into a company's financial planner strength and how well the capital structure is managed.

Analyzing Cash Flows

Using the cash flow modelling software statement in conjunction with other financial statements can help analysts and investors arrive at various metrics and ratios used to make informed decisions and recommendations.

Debt Service Coverage Ratio (DSCR)

Even profitable companies can fail if their operating cashflow does not generate enough liquidity. This can happen if a company's profits are tied up in accounts receivable and overstock inventory, or if it spends too much on capital expenditures.

Investors and creditors are concerned with a company's ability to meet short-term liabilities, so they investigate the debt service coverage ratio (DSCR) with cash flow modelling.

Debt Service Coverage Ratio = Net Operating Income / Short-Term Debt Obligations (also referred to as "Debt Service")

Liquidity is only one metric that can come into play for companies. They may have more cash because they are mortgaging their future by selling off long-term assets or taking on unsustainable levels of debt.

Free Cash Flow (FCF)

To calculate the true profitability of a business, analysts look at free cashflow (FCF). FCF is a more useful measure than net income because it tells a better story and helps you see what money the company has left over to expand or return to shareholders with cash flow modelling.

Free Cash Flow = Operating Cash Flow - Capital Expenditures

Unlevered Free Cash Flow (UFCF)

To calculate a measure of the gross cash flow generated by a firm, use unlevered free cash flow. This is the company's cash flow excluding interest payments and it shows how much liquidity is available before making any financial obligations into consideration when cash flow modelling.