- An investment flow involves the movements and variations of capital in an economic unit or company. Cash flow balances income and corporate income.What is an investing cash flow ?
An investment flow refers to variations and modifications in the amount of money that a company or economic entity has, which are generated from capital income and expenses based on investments in financial instruments, such as short-term debts, capital expenses associated with investments, the purchase of the real estate, and other acquisitions.
Cash flow is how a firm or organization uses and manages its money, taking into account expenses and income.. Investors who want to multiply their capital and decide to invest in companies or stock shares must know how expenses and income are managed and controlled to have confidence that their investment will be safe.
Thus, investment flow and cash flow affect an economic unit’s capital.
In the form of a note, the book Evaluation of Investment Projects by Gabriel Baca Urbina points out that “an investment project aims to know its economic and social profitability in such a way that you ensure that you solve a human need in an efficient, safe, and profitable way.”
Background to understand the investment flow
Investment flow history values and predicts company success.
Some specialists consider that this concept was developed in the mid-twentieth century in the United States under the cash-flow discount valuation approach, which involves valuing a company for its ability to generate free, medium, and long-term cash flows that must be updated to the present. The idea of valuing a company has come into the debate, reflected in how to know its correct or fair value. In that sense, it is important to consider the discussion between value and price since the company will have different values for different buyers and sellers.
From the economic approach, value is the degree of usefulness or aptitude of things to provide well-being or meet needs; in the field of companies, it is the degree of usefulness it provides to its users or owners; it can vary for buyers and sellers.
Similarly to the operating cash flow, this demonstrates the money and costs associated with conducting a business.Investing and taxation. The price translates into money, a convention that favors the trade of goods and services. Patrimonial, mixed, or profitability methods can value companies.
The correlation with cash flow
Cash flow, which, as mentioned, is linked to investment, refers to a report that records income and outflows of money that an organization has in a certain period, such as sales, collection of rents, interest, etc. These expenses can be: payment of bills, taxes, salaries, debt amortizations, loans, and goods, among other services. According to specialists, the difference between income and exits is known as the net flow balance; therefore, it is an indicator of the company’s liquidity level.If the balance is positive, the company earns more; if it is negative, the outflows exceed the capital.
Financial accounting is important for medium and large companies that need economic visibility.
Treasurers or accountants evaluate a company’s performance to make strategic operations, finance, and investment decisions.Business cash flow types include:
Operational cash flow
“Operational aspects” refer to capital levels and flows essential to a company’s operation.. It takes a look at things like payroll and inventory costs to see how well a business is doing financially. The emphasis here is on human capital.
Projected cash flow
The planned cash flow has an approach to anticipating future income and expenses so that you can keep the company’s budget prepared; therefore, the concept of administration appropriate to the installments of accounts payable and receivable is fundamental.
Direct cash flow
The operating cash flow indicates business income and expenses.Investments, taxes. It’s more complete and may be studied daily by cash flow.
Indirect cash flow
The demonstration of effective results (DRE) determines if the company made a profit or loss in a given period.. What is an investing cash flow ?
Free cash flow
Capital development requires 90-day company performance estimates.
Cash flow calculation
It is calculated by comparing the net profit to the amortizations made in a given period through the following formula: Cash flow = net profits + amortizations + provisions + accounts payable + accounts receivable.
Evaluation of an investment flow project
Efficiency and expected performance determine investment.Economic analysis guides project investment decisions.The evaluation of a project can be expressed in the following ways: in monetary units through the Net Present Value (NPV), in a cost-benefit ratio, by a percentage through the Internal Rate of Performance (IRR), or through a calculation of how long it will take to recover the investment. The two economic indicators most commonly used by financiers are the NPV and the IRR.
Inflation will reduce purchasers’ purchasing power in NPV circumstances.
Based on the reference rate, the NPV can determine if a project is lucrative (VAN > 0), not good (VAN < 0), or indistinct (VAN = 0). A project’s maximum interest rate, stated as a percentage, is the IRR.. It specifies the discount rate that renders the project’s NPV zero.What is an investing cash flow ?
Cash flow for the investor
According to Jhonny de Jess Meza Orozco, in his book Financial Evaluation of Projects, “the investor’s cash flow (cash flow with financing) allows us to measure the profitability of his contributions exclusively. For its correct construction and to measure the effect of financing, interest charges, and capital amortization are included in the project’s cash flow.”
The investor’s opportunity rate is the discount rate while financing the venture.If the financing of the investment is made with a mixture of the investor’s liabilities and resources, the cash flow of the project is different from the cash flow of the investor.”
Money and output—not rights or responsibilities—are project profitability metrics.Income statements don’t include project cash flow.
“The general model for building a cash budget, based on cash income and outflow information, is as follows”:What is an investing cash flow ?