Cash Flow forecast in a business plan

Planning of cash flows at new enterprises is a fairly simple procedure . Without practical experience we can not plan receivables or availability of down payments, that’s why all cash incomes form the input cash flow. While all spending money form output cash flow. The difference between input and output cash flows forms the net cash flow for a certain period.

Making cash flow forecast in a business plan, the main focus we have to make on net cash flow.

Cash Flow forecast in a business plan: focus on the main cash flow indicators

Net cash flow

Net cash flow is the main indicator that shows the efficiency of using the enterprise’s funds. Its positive value and growth are highly desirable for the any business owner, regardless of the way in which its capital was formed. However, considering the fact an enterprise may be frequently engaged not only in performing its main activity, but also an additional financial or investing one, it is important to evaluate the efficiency of the current production. That is why the second important indicator used during the cash flow evaluation is the net operating cash flow.

Through reporting sheets, the investors and analysts can see whether the company has certain development prospects or spends money on advertising purposes only. The output cash flows of the investment activity, i.e. funds invested into the growth of assets are meant here.

Free cash flow

International analysts introduced a concept of a free cash flow, an indicator characterizing the company’s ability to develop. Research conducted by Robeco company has also confirmed the possibility of predicting company returns using FCF metric. This research was confirmed by Bernstein’s studies (2016) that summarized the results of information gathered in 2016 having released a study entitled “Free Cash Flow is King.”

In this study, the Free Cash Flow (FCF) was expressed as a net operating cash flow (CFO) reduced by the amount of capital expenditures (CAPEX).


Free cash flow in practice

About 500 companies worldwide were chosen to participate in the MSCI All Countries World Index (2017). The rating was based on the value of a business estimated using the free cash flows. The studies were conducted globally, as well as at the level of Europe, the USA and the Pacific countries. The cost of companies was calculated quarterly, the indicators were collected both in industries and in separate enterprises. The results of the research were impressive. It is the coefficient of the free cash flow that led to an average surplus return on capital of 7% per year by industry and about 5% by individual enterprises.

As mentioned before, stock market isn’t a common resource used to finance Ukrainian enterprises. This is mainly due to the peculiarities of the development of large-scale entrepreneurship in Ukraine, which is based on the remnants of enterprises that were formed during the Soviet Union rule. The majority of enterprises with the most expensive shares on the Ukrainian stock market do not pay dividends to their shareholders. Managers re-invest the profit into the development of the enterprise. Such dividend policy does not attract investors, businessmen and population to invest their own free funds in the development of enterprises. The sad outcome is that small enterprises willing to develop their business by attracting funds from interested parties have no chance of receiving them because of distrust and lack of positive experience.

FCF and the investor’s interests

Nowadays, only young companies whose financial policy is based on progressive, pro-American financing standards with the clear rules can be interesting to investors. If an investor is financially motivated, he will not withdraw funds from business, instead trying to continue financing and developing the business.

That is why when a young entrepreneur tries to attract the investor’s attention to his own business, it is necessary to show the way a dividend policy will be built, that is, how much money will be spent on consumption and how much on capitalization.

A psychological moment of investors’ behavior should also be noted in this regard. Businessmen investing in long-term period are interested in profits to be spent on business development. The investors who invest for a short-term period, want to get their money back considering the interest. That is, they want the dividend policy to be aimed primarily at consumption.

Therefore, if it is necessary to raise funds for a long-term financing (more than one year), then the planned indicators should be shown in a way the investor could understand the company is focused on development. However, it is also important to demonstrate that, after some time, the investor will be able to return the investments with dividends. In order to attract short-term investors, it is necessary to plan the indicators in a way to interest them at once to invest in the company and obtain an immediate profit.

Net free cash flow

The free cash flow indicator should to be adjusted for the amount of interest to help investor assess the ability of the company to return the invested funds. This amount is known as current maturities of long-term debt (CMLTD). In this case the indicator is called Net Free Cash Flow (NFCF). It is calculated according to the formula:


For enterprises with the own capital formed by the depositors’ funds, it is expedient to adjust the indicator additionally for the amount of dividend payments (D). Thus, the free cash flow is calculated as follows:


Consequently, we have identified a universal indicator of the net free cash flow that is fully relevant for e-commerce companies. The availability of the net free cash flow not only shows the knowledge of the business owner in finances, but also his understanding of how the investments work. The indicator reflects the amount a business owner needs to strive to make it interesting for the investor to collaborate.

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