Among the evaluation models of existing companies, the free cash flow stands out for the possibilities of application that it offers. In this article, you will learn the concepts of this method and know how this flow is calculated and what the advantages of adopting it in your financial control strategy. Finally, we will present an important tool to assist you in the accounting administration of your business.
Defining the concept of free cash flow
The free cash flow, roughly speaking, is the amount available calculated taking into account the investments and working capital needs. Expenses that do not necessarily imply cash outflows, such as amortization, should also be accounted for. It is important to consider that free cash flow in the long term should always be positive, since the opposite would imply that the company does not generate sufficient resources to meet the commitments made with financiers.
Because it is a widely known method, its forms of calculation can undergo variation. THE Statement of Cash Flow (DFC) is the indicator that will indicate the outputs and inputs in a given period and the result, this according to the method adopted. Notice a free cash flow model:
In this model presented, there are two important terms that must be correctly understood:
- EBIT - This is an acronym for "Earnings before interest and taxes", or "Income before Interest and Income Tax - LAJIR". In short, it would be the operating profit, that is, the difference between gross profit and operating expenses.
- EBITDA - In English, "earnings before interest, taxes, depreciation and amortization", which in a literal translation can be defined as "Income before interest, taxes, depreciation and amortization - LAJIDA". As an indicator, it provides a debugging of the results and serves as a metric for the analysis of the company's business productivity.
According to the normative instruction of the Brazilian Securities and Exchange Commission (CVM), EBIT and EBITDA should be based on the numbers disclosed in the financial statements, especially the Statement of Income (DRE).
Free cash flow analysis
As you may have already guessed, free cash flow provides you with the amount you get free of charge. In other words, analysis of free cash flow will tell you if there was cash inflow or outflow of the company in the period. Such method is important to define the value to be passed on to shareholders and suppliers or to subsidize decisions regarding possible investments. It is advisable to analyze the past periods in order to ascertain if any negative results are sporadic or are repeated constantly, indicating if the company will be able or not to honor their commitments in the future, a very important aspect for the economic health of the company.
Projection of economic viability
In order for you to make a more detailed forecast of the feasibility of planned investments, Luz.vc has prepared a very special tool. THE 3.0 Economic Feasibility Study Worksheet allows the realization of projections for three years, from the information of general assumptions of investments and fixed costs.
Based on the information, the worksheet will automatically present the projected scenario. Two items are designed specifically for the projection of optimistic or pessimistic scenarios, allowing you to define the percent oscillations in the projections of increase or decrease in expenses, revenues and investments, as well as generate evaluative graphs. The "alerts and tips" tab evaluates the three scenarios projected, indicating whether or not the project is feasible and pointing out factors that deserve more attention.
Through analysis of free cash flow, it is possible to obtain a perspective of the sustainability of the company's business. With our 3.0 Economic Feasibility Study Worksheet, you can go deeper in your planning. Know our tool and tell us what you think!