Financial forecasting allows, to a certain extent, to improve enterprise management and achieve better results by ensuring the coordination of all factors of production and sales, the interconnection of the activities of departments, etc. To obtain reliable results, financial projections must be based on rigorous data and carried out using specific methods. financial analysis.
Financial Forecast differs from the plan and budget. A forecast is a preliminary assessment (prediction) that takes the form of a plan only when the company's management chooses it as a development goal, building an activity program based on it. At the same time, financial forecasting is the basis for financial planning (ie the preparation of strategic, current and operational plans) and financial budgeting (ie the preparation of general, financial and operational budgets).
The starting point of financial forecasting is the forecast of the volume of sales (sales) and the corresponding costs; end point and goal - calculation of the need for external financing.
The main steps in forecasting funding needs are as follows:
1) compiling a sales forecast using marketing tools;
2) making a forecast of variable costs;
3) drawing up a forecast of investments in fixed and current assets necessary to achieve the projected sales volume;
4) calculation of the need for additional (external) financing and search for appropriate sources, taking into account the principle of forming a rational structure of sources of funds.
The first step is taken by marketers, the next steps are taken by financiers.
The budgetary method of financial forecasting is based on the concept of cash flows. One of its main tasks is to assess the sufficiency Money for the upcoming period. The main tool for this is cash flow analysis. The change in cash for the period is determined financial flows representing receipts and expenditures of funds. In this regard, it is necessary to identify in advance the expected shortfall of funds and take measures to cover it. The budget method is essentially the financial part of the business plan.
Let's consider a more compact method, which is based on the coordination of financial indicators with the dynamics of sales volume (the so-called percentage of sales method). At the same time, such a calculation is possible in two versions: based on the compilation of the forecast balance and using a formula. Forecast balance represents a balance for the forecast period, based on the forecast volume of sales and the coordination with it of the financial resources necessary to ensure it.
All calculations are based on the following assumptions.
1. Variable costs, current assets and current liabilities, with an increase in sales by a certain percentage, increase on average by the same percentage. This also means that both current assets and current liabilities will be the same percentage of revenue in the forecast period.
2. The percentage of increase in the value of fixed assets is calculated for a given percentage of increasing the volume of sales in accordance with the technological conditions of the enterprise and taking into account the presence of underutilized fixed assets at the beginning of the forecast period, the degree of material and obsolescence of cash production assets, etc.
3. Long-term liabilities and equity of the enterprise are taken unchanged in the forecast. Retained earnings are projected taking into account the distribution rate net profit on accumulation and net profitability of realization: the projected reinvested profit is added to the retained earnings of the base period (the product of the projected net profit and the rate of distribution of profit on accumulation or, which is the same, per unit minus the rate of distribution of profit on dividends). The projected net profit (Ph) is defined as the product of the projected sales revenue (Np) and the net (i.e. calculated from net profit) profitability of sales (KRn):
Hence Pch = Np KRn.
Having made the appropriate calculations, they find out how many liabilities are not enough to cover the necessary assets with liabilities - this will be the required amount of additional external financing. This amount can also be calculated using the following formula:
where PF is the need for additional external financing;
Afact - variable assets of the base period;
Pfact - variable liabilities of the base period;
DNp - growth rate of proceeds from sales;
Base period net profit;
Base period revenue;
Projected revenue;
Krn - the rate of distribution of profits for accumulation.
The formula shows that the need for external financing is the greater, the greater the rate of revenue growth, and the less, the greater the net profitability of sales and the rate of distribution of profits for accumulation. At the same time, variant calculations can also be made, taking the desired net profitability of sold products in the future, as well as the predictive (desirable or possible) rate of distribution of profits for accumulation.
Consider an example. Let's put in the forecast balance the actual net profitability of sales in the amount of 3.6% and the distribution rate of net profit for accumulation in the amount of 40%. The actual proceeds from sales amounted to 20 million rubles, the projected proceeds - 24 million rubles, which gives a revenue growth rate of 20% (or 0.2). Let us calculate the need for additional financing, first using the forecast balance, compiled on the basis of these three assumptions, and then using the formula. We will make calculations for the situation of full capacity utilization in the base period. At the same time, let's assume for simplicity that the fixed assets must increase in the same proportion to ensure the new sales volume, i.e. by 20% (or 0.2).
From the forecast balance (Table 5.12) it follows that the need for additional financing
PF \u003d 12000 - 10545 \u003d 1455 thousand rubles.
Using the formula, this calculation will look like this:
10000 0.2 - 1000 0.2 - 24000 0.036 0.4 \u003d 1455 thousand rubles.
Thus, in order to ensure the projected sales volume, new capital investments in fixed assets are required in the amount of (7200 - 6000) = 1200 thousand rubles. At the same time, the necessary increase current assets should be (4800 - 4000) = 800 thousand rubles. The increase in current liabilities (1200 - - 1000) \u003d 200 thousand rubles. and equity due to retained earnings (6345 - 6000) = 345 thousand rubles. unable to meet growing financial needs. A deficit is formed in the amount of (1200 + 800 - 200 - 345) = 1455 thousand rubles, which the financiers of the enterprise will have to find.
Table 5.12
Forecast balance
| Index | Accounting balance | Forecast balance |
| 1. Current assets | (20% of revenue) | 4000+4000 0.2 = 4800 or 24000 0.2 = 4800 |
| 2.Main assets | (30% of revenue) | 6000+6000 0.2 = 7200 or 24000 0.3 = 7200 |
| 1.Current liabilities | (5% of revenue) | 1000+1000 0.2 = 1200 or 24000 0.05 =1200 |
| 2.Long-term liabilities | ||
| 3. Reinvested profit of the forecast period | 24000 0.036 0.4 = 345 |
|
| 4.Equity | ||
| 5.Invested capital | ||
Now we can turn to further forecasting by introducing into the financial forecast the condition of expanding debt capital to cover the identified need for additional financing. This will be expressed in a change in the financial policy of the enterprise. In the base year, with the amount of invested capital of 9,000 thousand rubles. the share of borrowed capital in invested capital was at the level of 33.3% (that is, for each ruble of equity capital, there were 50 kopecks of debt). This corresponds to a ratio of debt and equity equal to 0.5. Suppose that, given the need for funds to ensure the planned growth in sales, the management of the enterprise decided to increase the share of debt to 43% in the forecast year, or to bring the ratio of borrowed and equity capital to 0.75.
This forecast will also require additional data. Return on equity in terms of earnings before interest (net income) is 8%, this figure is planned to remain unchanged. At the same time, it was decided to increase the share of reinvested profits to 50%, reducing the payment of dividends accordingly. At the same time, we will take the interest rate for a loan in the amount of 10%, which will require the payment of interest on borrowed capital in the amount of 300 thousand rubles. (3000 × 0.1). It is also assumed that, as before, deductions to the sinking fund are automatically used to pay off the operating costs of the existing fixed capital (Table 5.13).
If the old ratio of debt to equity had been maintained in the forecast year, an additional 84,000 rubles could have been borrowed. secured by increased equity capital. But an increase in the share of debt will allow an additional loan of 1,569 thousand rubles. more than the allowable amount under the old ratio. This amount is calculated based on the total amount of debt, which can be 43% of the invested capital. This means that the new amount of equity in 6168 thousand rubles. = = (6000 + 168) represents 57% (100 - 43) of the invested capital, which, therefore, will amount to 10821 thousand rubles. (6168: 0.57). From here borrowed capital can be (10821 - 6168) = = 4653 thousand rubles. The additional loan as a result of the change in financial policy, therefore, is equal to (4653 - 3000 - 84) = 1569 thousand rubles. Similar calculations can be continued further, making a forecast for three, four or more years.
Table 5.13
Financial forecast when changing the financial policy of the enterprise
| Indicators | Base year | Forecast year |
| 1. Share of debt in invested capital | ||
| 2. The ratio of debt and equity capital | ||
| 3. Own capital (3+12) | ||
| 4. Borrowed capital (5–3) | ||
| 5.Invested capital | ||
| 6. Return on invested capital before interest (plan) | ||
| 7. Profit (5x6) | ||
| 8. Interest rate | ||
| 9. Amount of interest payments (4x8) | ||
| 10. Profit after interest (7-9) | ||
| 11. Profit distribution rate for accumulation | ||
| 12. Reinvested profit (10x11) | ||
| 13. Dividends (10–12) | ||
| 14. New debt at the old ratio (12x2) | ||
| 15. New Debt When Ratio Changes | ||
| 16. New investments, total (12+14+15) | ||
| 17. Return on invested capital after interest and taxes (10:5) | ||
| 18. Return on equity (10:3) | ||
| 19. Equity at the end of the period (3+12) | ||
| 19. Capital gain | ||
| 20. Earnings per share (100,000 shares) | ||
| 21. Dividends per share |
This example once again demonstrates the importance of the size of the interest rate, which we have already seen in the analysis of the effect financial leverage. The interest rate should not be higher than the return on equity ratio. This is one of the most important principles of financial management. The high level of interest rates actually deprives enterprises of credit sources of replenishment of working capital and investment funds, forces them to look for other sources, including in the form of an unjustified increase in accounts payable (for wages and payments to the budget), creates a crisis of non-payments.
One of the main advantages of such forecasting is that any deterioration in the situation or unfavorable trend becomes obvious. If an undesirable result occurs, you can change some conditions (which are modifiable) or adopt more realistic policies, such as dividends, and calculate the effect of such changes.
For more accurate calculations, it is useful to adjust the initial assumptions about the return on invested capital. AT this example the assumption of a general level of profitability for all investments was accepted. It is more realistic to distinguish between the profitability of existing assets and the profitability of incremental assets, taking into account the time lag in making a profit on new investments. Such an adjustment is especially useful in the case of diversification of the company's activities, since the profitability of new activities may differ significantly from existing ones.
The basis of financial planning is financial forecasting, i.e., an assessment of the possible financial consequences of decisions made and external factors affecting the company's performance. The starting point of financial forecasting is the forecast of sales and related expenses; the end point and goal is the calculation of the need for additional funding.
the main task financial forecasting consists in identifying additional financing needs that appear as a result of an increase in the volume of sales of goods or the provision of services.
Forecasting Additional Financial Needs
The expansion of the enterprise (increase in sales volumes) inevitably leads to the need to increase its assets (main and working capital). According to this increase in assets, additional sources of financing should appear. Some of these sources (for example, accounts payable and accrued liabilities) increase in accordance with the increase in sales volumes of the enterprise. The difference between the increase in assets and liabilities is the need for additional financing.
Thus, the need for external financing will be the greater, the greater the existing assets, the rate of revenue growth and the rate of distribution of net profit for dividends, and the less, the greater the short-term liabilities and net profitability of sales.
In the process of making a decision on additional funding, allocate the main stages of forecasting funding needs:
§ preparation of a sales forecast based on statistical methods using economic and mathematical models, as well as on the basis of expert assessments;
§ making a forecast of variable costs;
§ drawing up a forecast of financing of fixed and current assets required to achieve the required sales volume;
§ Calculation of needs for external financing and search for appropriate sources.
The calculation of the need for external financing is carried out using the percentage of sales method.
This method is based on the following assumptions:
§ variable costs, current assets and current liabilities increase in proportion to the increase in sales;
§ change in fixed costs
associated with the maximum value and the actual degree of capacity utilization;
§ the percentage of increase in the value of fixed assets is calculated for a given percentage of increase in turnover in accordance with the technological conditions of the business and taking into account the cash underutilized fixed assets at the beginning of the forecasting period, the degree of material
and obsolescence of available means of production, etc.;
§ long-term liabilities and share capital are taken into the forecast unchanged;
§ Retained earnings are projected taking into account the rate of distribution of net profit for dividends and the net profitability of sales: the projected net profit is added to the retained earnings of the base period and dividends are deducted.
If the enterprise does not have the ability or desire to attract additional sources of funds, possible ways to solve the problem are to reduce the rate of distribution of profits for dividends and increase the net profit margin on sales.
After making the necessary adjustments, they calculate how many liabilities are not enough to cover the necessary assets. This will be the required amount of additional external funding.
The process of public financial planning and forecasting
Budget - basic financial plan states
For each state, such a process is necessary as a list of income received at the disposal of the authorities state power and the costs incurred by them. The state budget is the central link in the country's financial system. Its main purpose is, with the help of financial resources, to create conditions for effective development economy and solution of national social problems. Such, for example, as providing the population with public goods and services, redistributing income, and stabilizing the economy.
Thus, the state budget is a financial plan that compares expected revenues and expenditures. When the latter are equal to each other, the budget is called balanced. When revenues exceed expenditures, this difference is a positive balance, or budget surplus. When budget spending is greater than revenue, the difference is called a negative balance, or budget deficit.
The budget is the central element of the financial system of the state. With its help, goals and objectives can be achieved, due to economic policy. At the same time, the importance of state regulation cannot be overestimated. There are main categories included in the budget of any state - these are taxes, loans, expenses, which always remain unchanged.
However, the history of finance shows that the budget was not inherent in the state at all stages of its development. For a long time, the state had no budget at all. In all European states, including Russia, revenues were collected and expenses were carried out, i.e. on legal norms there was a system of income and expenses. The budget was fully formed when the state, in its financial activity introduced a planned start - began to draw up a system of income and expenses for a certain period.
Finance is a system of imperative monetary relations, in the course of which centralized and decentralized funds of funds are accumulated, distributed and used. Therefore, the budget is a system of imperative monetary relations, in the process of which the budget fund is formed and used.
Like any other plan, the state budget must be drawn up for a certain period. In many states, one year was chosen as such a period, which was called the financial year.
The basis of the budgetary-legal status of the state and its territorial subdivisions is the right of the state to independence of the budget.
Thus, the budgetary law is called the totality of all those laws that determine the procedure for drawing up, reviewing, approving and executing the budget. The budget is also a political act, i.e. management plan for the future, a management program proposed by the executive branch for parliamentary approval.
Of course, the concept of budget is broad and it cannot be reduced only to painting. The painting refers to the budget, as part of the general. In this sense, the list is only as an application of the budget law to this particular case. The budget determines general rules drawing up and approving a financial plan, and the list is a financial plan for a given period.
The budget acts as an economic category, represents monetary relations arising from the distribution and redistribution of GDP in order to form and use a centralized monetary fund.
Any budget performs the following main functions:
1. Redistribution of the gross domestic product (GDP);
2. State regulation economy of the country and stimulation of economic activity;
3. Implementation social policy state and financial support of the public sector as a whole;
4. Control over the formation and use of centralized funds of funds.
Any growing company sets itself the goal of increasing sales, which, as a rule, leads to an increase in assets. In turn, the growth of assets leads to the need for additional financing from external sources, if internal sources are not enough. One method for determining the need for additional funding is the concept necessary additional funds (English Additional Funds Needed, AFN), which is based on the assumption of the constancy of the main financial ratios.
Formula
To calculate the required additional funds, you must use the following formula:
S 0 - revenue for the last period;
S 1 - expected revenue;
ΔS is the expected increase in revenue;
A 0 - the value of assets for the last reporting period;
L 0 - the amount of spontaneously arising obligations 1 in the reporting period;
Calculation example
The main performance indicators of the KFG Company in the reporting period were as follows:
- assets 12500 thousand USD;
- accounts payable 2750 thousand USD;
- revenue 18,000 thousand USD;
- net profit 1450 thousand USD;
- cash flow for the payment of dividends 900 thousand USD;
- the revenue growth rate is 5%.
To use the above formula for calculating the additional funds required, we calculate the expected revenue, revenue growth, return on sales, and the dividend payout ratio.
S 1 \u003d 18000 * (1 + 0.05) \u003d 18900 thousand c.u.
ΔS \u003d 18000 * 0.05 \u003d 900 thousand c.u.
M = 1250/18000*100% = 6.94%
POR = 950/1250 = 0.76
Substitute the obtained values into the formula:
Thus, the required additional funds or the company's need for external financing will amount to 172.7 thousand USD.
Factors affecting the need for external financing
- Revenue growth rate, g. Fast-growing companies require a significant increase in assets, and, consequently, a large need for external financing. With a shortage of supply in the capital market, ensuring high growth rates can become problematic.
- Capital intensity, A 0 /S 0. The coefficient shows how many assets are needed to form 1 c.u. revenue. The higher the capital intensity, the more assets are required to increase sales. Consequently, the need for the necessary additional funds will be higher for companies with high values this ratio and vice versa.
- Ratio of spontaneously arising liabilities and revenue, L 0 /S 0. The higher the value of this ratio, the lower the company's need for external financing. For example, if a company can get a deferral in accounts payable from 10 days to 20 days, then this could increase this ratio. However, it should be remembered that an increase in current liabilities has negative effect other metrics such as net operating working capital and free cash flow.
- Return on sales, M. The higher the return on sales, the more net income the company has to finance the growth of assets, and, therefore, it will have less need for the necessary additional funds.
- Dividend payout ratio, POR. The lower the value of this ratio, the more retained earnings remain at the disposal of the company to finance the growth of assets.
Problems in use
The main problem practical application equation of the necessary additional funds is the assumption of the constancy of the main financial ratios. In reality, this assumption does not always turn out to be true, although some regularities are quite stable.
An example of such a problem is excess capacity, when a company, for some reason, does not fully load its production capacity. In this case, the growth in revenue will not necessarily be accompanied by an increase in the need for additional external financing, and the equation for the additional funds needed should be adjusted as follows.
where S' is the revenue, taking into account the fact that the production facilities were fully loaded.
In this case, S' is calculated according to the following formula:
S’ = S 0 / Percentage of capacity utilization
Let's consider the adjustment procedure on the condition of the previous example, assuming that the capacities of the KFG Company were loaded at 95% in the reporting period.
Calculate the revenue provided that the production capacity was fully loaded.
S' = 18000 / 0.95 = 18947.4 thousand c.u.
Substituting the obtained data into the AFN equation, we get that the necessary additional funds for the KFG Company will amount to 141.5 thousand USD.
In this case, the need for external financing will be lower by 31.2 thousand c.u. (172.7-141.5), since part of the increase in sales will be provided by additional loading of existing assets.
It is believed that due to own sources the minimum but sufficient need of the organization for current assets should be covered, while the additional need is covered by attracting borrowed resources into the turnover of the enterprise.
In the process of forming the value of the enterprise's current assets and choosing the sources of their financing, the indicator of the current financial need of the enterprise - TFP (financial and operational need of the enterprise - FEP) is calculated. It is directly related to the turnover of current assets and accounts payable.
The indicator can be calculated in the following ways:
1. TFP \u003d (Inventories + Accounts Receivable) - Accounts Payable for goods and materials.
2. DFT = (Current assets - Cash - Short-term financial investments) - Accounts payable for goods and materials.
It should be noted that in order to assess and analyze the value of TFP, this indicator can be calculated as a percentage of turnover:
TFP level = (TFP in monetary terms / Average daily volume
sales)x100%
The economic meaning of using the TFP indicator shows how much the company will need funds to ensure the normal circulation of inventories and receivables in addition to that part of the total cost of these elements of current assets, which is covered by accounts payable.
For an organization, it is important to bring the DFT value to a negative value, i.e. payables to cover the cost of inventories and receivables. The less TFP, the less the company needs its own sources to ensure uninterrupted activities.
Therefore, it can be summarized that the TFP indicator characterizes the lack of an enterprise's own working capital. With existing sources of financing, it can be covered by attracting short-term loans. Consequently, positive value DFT reflects the need of the enterprise for additional sources of financing of current assets, for example, in short-term loans.
In this regard, the prospective need of the enterprise for sources of financing for current activities (in a short-term bank loan) (TSP) can be determined as follows:
Dsp \u003d SOS - TFP.
If at the same time DSP< 0, то у компании существует дефицит денежных средств. Если же ДСп >0, then the company has a cash surplus. In this case, the company can expand the scope of its activities by increasing the number of products or diversifying production activities.
The following factors influence the value of TFP:
1. The duration of the production cycle. The faster inventory turns into finished goods, and finished products into money, the less is the need to advance working capital into inventories and finished products.
2. Production growth rates. The higher the growth rate of production and sales of products, the greater the need for additional advances in funds for production stocks.
3. Seasonality of production. It determines the need to create inventories in large volumes.
4. Forms of payment. Providing deferrals on payments to its customers increases the receivables of supplier enterprises and contributes to the growth of TFP.
Obtaining deferrals for payments to creditors, suppliers of goods and materials, on the contrary, contributes to obtaining a negative value of the TFP. However, a small and even negative value of this indicator does not always mean a favorable financial situation for the enterprise.
This happens if:
. the production stocks reflected in the assets of the balance sheet of the enterprise do not correspond to the need for them;
. the sale is unprofitable, i.e. the costs of production and sale of products exceed the amount of proceeds from the sale;
. Accounts payable includes overdue debt for the supply of goods and materials (works, services). Since the current financial needs are part of the net working capital of the enterprise, the problem arises of managing the amount of working capital (working capital).
The solution to the problem of working capital management involves, firstly, the calculation of the optimal level and structure of working capital, and secondly, the establishment of the optimal ratio between the sources of working capital financing. As a target function of efficiency in solving the tasks set, it is advisable to take a function that maximizes the profit of the enterprise, and as restrictions on this target function will be the required level of liquidity of working capital and the amount of commercial risk of the enterprise arising from the financing of working capital from various sources.
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One of the indicators of the effectiveness of investment projects - the need for additional financing (hereinafter referred to as the PF) - is equal to the maximum value of the absolute value of the negative accumulated balance from investment and operating activities or the accumulated cumulative balance of the total cash flow (the maximum balance of the accumulated flow). That is, the PF is found as the maximum negative value of the accumulated cumulative difference between operating and investment flows by calculation steps. According to the table, the need for additional financing is CU 148.4.
The value of the PF shows the minimum amount of external financing of the project required to ensure its financial feasibility. Therefore, PF is also called risk capital.
The value of the PF indicator is not normalized. The smaller the absolute value of the PF, the smaller the amount of funds should be attracted to implement the project from funding sources external to the project.
Table 12 - Cash flows No. Indicator Number per calculation step (n) 0 1 2 3 4 5 6 7 8 1 0 2 Investment activity 2.1 Inflows 0 0 0 0 0 0 0 0 10 2.2 Outflows -100 -70 0 0 -60 0 0 0 -90 2.3 Balance Fin -100 -70 0 0 -60 0 0 0 -80 3 Balance total flow Fn=Fon+Fin -100 -48.4 49.3 49.7 -26 80.7 81 66 -80 4 Accumulated flow balance -100 -148.4 -99.1 -49 -75 5, 7 87 153 72.8 5 Discount factor v 1 0.9 0.8 0.8 0.7 0.6 0.6 0.5 0.5 .5) -100 -44 40.9 37.2 -17 50 45.4 33.7 -38 7 Discounted balance of accumulated flow -100 -144 -103 -669 -84 -33 12 45.9 8.3 8 Discounted investments (line 2.3-line 5) -100 -63.7 0 0 -41 0 0 0 -38 It should be borne in mind that the actual amount of funding required does not have to coincide with the PF and, as a rule, exceeds it at the expense of non-necessity of debt service. Nevertheless, this indicator is acceptable for the analysis of investment projects.
The need for additional financing, taking into account the discount (hereinafter referred to as DFT) is the maximum value of the absolute value of the negative accumulated discounted balance from investment and operating activities. According to Table. 4 The need for additional financing, taking into account the discount, is CU 144.
The value of the DFT shows the minimum discounted amount of external financing of the project required to ensure its financial feasibility.
Net income (hereinafter referred to as NV, other names - Net Value, NV) is the accumulated effect (cash flow balance) for the billing period:
where the summation applies to all steps of the billing period.
In accordance with the Guidelines for evaluating the effectiveness of investment projects, the balance of the total cash flow Фn is formed from operating and investment flows. That is, the balance of the total cash flow, when it refers to the calculation step n, is determined by the expression:
Fn \u003d Fon + Fin,
where Fon is the cash flow from operating activities for the calculation step n; Fin - cash flow from investment activities for the calculation step n.
Cash flows from investment activity Fi Methodological recommendations mainly include investment investments, which mean an outflow of funds. Therefore, the value of Phi will be, as a rule, negative. Flows from investments Fin, in fact, constitute net investments, which we agreed to designate as CI and which are subtracted from the proceeds from the investment project when calculating the total flow Фn. Therefore, the formula for the total cash flow Фn for a more visual expression of inflows and outflows of funds can be represented as a difference:
Fn= Fon + Fin= Fon - CIn.
Representing the expression as the difference between receipts Fo and investment investments CI makes it possible to more clearly reflect the principle of the investment process.
Based on the above expressions, we represent net income as components of cash flows:
The positive or negative flow (effect) achieved at the nth step of the Fn calculation in the economic (commercial) sense, consists of income FV and expenses З:
Fon = FVn - Zn = FVn - (CCn - An) - Hn = Pn + An,
where FVn is the gross income from the sale of goods (in industry, the proceeds from the sale of products, works, services); CCn - full production costs (in trade - circulation) at the nth step of calculation; Hn - total taxes at the nth calculation step; Pn - net profit at the nth calculation step; An - depreciation deductions at the nth calculation step.
Depreciation does not entail a real outflow of cash, so the amount of depreciation is excluded from the amount of costs.
In general, net income can be written as an expression:
,
where CIn is the sum of investment investments over n calculation steps.
The net income indicator for all performance characteristics must be positive. The negative value of the BH indicates the unprofitability of the project.
Example.
The company's management intends to invest in the production of new products with an expected revenue of 116 million rubles. in 4 years. To ensure production, average annual costs without depreciation deductions in the amount of taxes and payments attributed to financial results and income tax of 5 million rubles will be required. Capital investments (CI) in total for the entire investment period are 60 million rubles. The discount rate (r) is set at 11% per year.
Determine the amount of costs for 4 years. It will be:
Z4 \u003d 5 * 4 \u003d 20 million rubles.
Based on formula (11), the net income for this project is:
million rubles
Net income reflects the effect of using an investment project for a certain period of time. But comparing investments by this indicator is acceptable for projects with an equal number of periods (steps) of investment and approximately the same life cycle.
For profitable projects at a later stage of operation, income increases due to the long-term use of the investment in relation to the initial investment and, conversely, by early stage operating a profitable project, the firm does not yet have time to get the full return on investment. Initial investment investments are able to give a greater return on their longer operation. Moreover, not all projects are comparable when compared over the same period of operation. Investments with a shorter life cycle should pay off before investments with a longer one. billing period operation. Otherwise, they will not have time to bring enough profit during their shorter period. life cycle.
Therefore, the performance indicators of investment projects with different periods are not comparable both in terms of the amount of investment proceeds and the amount of investment investments. In order to correctly compare project performance indicators, they are brought to a comparable form by discounting, where discounting, as noted, means bringing the indicators to a single base period, which ensures comparability of the estimated indicators.
To do this, use the net discounted (reduced) income (hereinafter referred to as NPV, other names - the integral effect, Net Present Value, NPV) - the accumulated discounted effect for the billing period.
Under the NPV (NPV) understand the difference discounted at one point in time indicators of income and investment. If incomes and investments are presented in the form of a stream of income, then NPV is equal to the basic or modern value of this stream.
Thus, the method of calculating net present value is based on comparing the value of the initial (net) investment (CI) with the total amount the discounted net cash flows it generates over the forecast period. Since the cash inflow is distributed over time, it is discounted using the discount rate r, set by the investor himself, based on the annual percentage of income that he plans to have on the invested capital.
In the wording of clause 2. 8 of the guidelines for evaluating the effectiveness of investment projects, the net present value for a given calculation step (or period) should be determined by substituting the discount factor into the NV (NV) formula:
,
or
If NPV of the investment project is positive (with a given discount rate), then the project is considered effective and the issue of its implementation can be considered; at the same time, the higher the NPV value, the more profitable the project.
That is, if NPV > 0, then the project is profitable; NPV If there are alternative investment projects, the project with the highest NPV is chosen.
Based on the given example, we calculate the net present value at the end of 4 years of project operation.
We calculate NPV using the formula:
million rubles
Net present value relating to the fourth calculation step expresses the basic value of net income and amounts to million rubles. Since the NPV of the investment project is positive, the project is efficient and worth implementing.
The difference between the net income NV and the net discounted income NPV is called the discount of the project. In our example, it is equal to:
D \u003d NV - NPV \u003d 36 - 23.71 \u003d 12.29 million rubles.
The sum of the initial investment CI may consist of investments that increase according to the compound interest rule with a discount rate k, when the discount rate k for CI investments differs from the discount rate r for returns P0. The norm of discount k for CI investments can, for example, be interest on a loan invested in an IP with payment of loan expenses according to the compound interest rule.
In this case, the NPV formula takes next view:
where n is the discount rate for the current from operating activities Fon; k is the discount rate for costs that increase according to the compound interest rule and are included in the original investment CI, for example, interest k on the amount of the CI loan invested in IP with payment according to the compound interest rule.
It is possible to determine the NPV using a different formula in which the discounted balance of the total cash flow Fon \u003d FVn - Zn is compared with the undiscounted initial investment CI:
,
When calculating the NPV according to the formula, where the amount of initial investments is not discounted, we obtain the value
million rubles
This formula is more often used if the project makes one-time investments for the entire billing period or when the initially invested capital is substituted into the formula as the initial investment CI without including in the CI the value of the initial investment increasing according to the compound interest rule.
In this case, the project discount will be equal to:
D \u003d NV - NPV \u003d 36 - 3.24 \u003d 32.76 million rubles.
So, the calculation of NPV can be done in two ways:
comparison of the discounted balance of the total cash flow Fn=FVn - Zn with discounted initial investments;
by comparing the discounted balance of the total cash flow Fn=FVn - Zn with undiscounted initial investments.
In the managerial analysis of investments, the entrepreneur has the right to choose any of these methods, based on the above explanations, in accordance with the interests of the company, or both methods in combination.
Net present value combines both intensive characteristics (income relative to initial investments) and extensive characteristics (the amount of income determined by the volume of investment investments). The intensity of return, the level of effect from a unit of investment is assessed using investment return indices. They are also called the ROI index.
Thus, profitability indices characterize the (relative) return of the project on the funds invested in it. They can be calculated for both discounted and non-discounted cash flows.
Return on investment index (ID) is the ratio of the sum of cash flow elements from operating activities to the absolute value of the sum of cash flow elements from investment activities.
where CIn is the sum of investment investments for n calculation steps.
The yield index reflects the income attributable to each ruble of invested investments. It is equal to the ratio of BH increased by one, divided by the accumulated amount of investment.
According to the given example, the index of return on investment will be:
The calculation shows that the index of return on investment is above one, which indicates the profitability of the project with an excess of profit in relation to the initial investment. This means that for every ruble of funds invested in the project, the organization will receive a ruble.
Like the previous indicators, the yield index is discounted. According to clause 2.8 methodological recommendations according to the evaluation of the effectiveness of investment projects, the discounted investment return index (DII) is the ratio of the sum of discounted cash flow elements from operating activities to the absolute value of the discounted sum of cash flow elements from investment activities. That is, it corresponds to the expression:
,
As a result of reducing the fraction by the discount factor, the index of return on discounted investments is equal to the index of return on investment:
,
IDI is also equal to the ratio of NPV to the accumulated discounted investment volume increased by one:
,
If NPI > 1, then the project is profitable; NPI Investment Return Indices are greater than 1 if and only if the NPI for that flow is positive.
Discounted investment return indices are greater than 1 if and only if the NPV for this stream is positive.
The proximity of the IDI to 1 may indicate a low stability of the project to possible fluctuations in income and expenses.
When calculating ID (NI) and NPI (NPI), either all capital investments for the billing period, including investments in the replacement of retiring fixed assets, or only initial investments made before the enterprise is put into operation can be taken into account (the corresponding indicators will, of course, have different values) .
According to our example, the IDD is equal to:
The result confirms the equality NPI = NI.
ID (NI) will differ from NPI (NPI), i.e., the given equality will not be fulfilled and the NPI formula will make sense if the sum of the initial investments CI includes investments increasing according to the compound interest rule with a discount rate k that differs from the norm discount r for income. The discount rate k for CI investments can, for example, be the interest on a loan invested in an IP with payment of loan expenses according to the compound interest rule.
In this case, the IDD formula takes the following form:
,
where n is the discount rate of the flow from operating activities Фn; k is the discount rate for costs that increase according to the compound interest rule and are included in the initial investment CI, for example, interest k on the amount of the CI loan invested in IP with payment according to the compound interest rule.
Calculation of NPI (NPI) can also be carried out according to the formula in which the discounted balance of the total cash flow correlates with the undiscounted initial investment.
That is, in the IDD formula, only the balance of the total cash flow Fn = FVn - Zn is considered discounted, and the initial investment CI is used without reduction:
Like net present value (NPV) calculations, this NPV calculation formula is mainly used if the project makes one-time investment investments for the entire billing period or when additional subsequent investments of a non-systematic nature are made, and also when CI is used as initial investment in the formula is substituted with the initially invested capital without including its increasing value in CI according to the compound interest rule.
The discounted investment return index (DII) according to formula (17) and the data of the example used will be:
Since the value of ADI is greater than 1, the project should be considered effective.
That is, as in the calculation of net present value (NPV), two methods are possible when calculating NPV:
DDI as the ratio of the discounted balance of the total cash flow Fn=FVn - Zn to the discounted initial investments, formula (16);
IDD as the ratio of the discounted balance of the total cash flow Фn=FVn - Зn to the undiscounted initial investments;
In the managerial analysis of investments, the entrepreneur has the right to choose any of the methods in accordance with the interests of the company, or both methods in combination.
The investment analysis also uses the indicator of the internal rate of return (hereinafter referred to as IRR, other names are the internal rate of discount, internal rate of return, Internal Rate of Return, IRR).
In the most common case of investment projects that start with investment costs and have a positive NRR, the internal rate of return is the positive value of the discount rate r, at which the NPV of the project is zero:
IRR = r,
under which
NPV = f(r) = 0.
For all values of the internal rate of return IRR greater than the discount rate r, the net present value NPV is negative, for all values less than r it is positive. If at least one of these conditions is not met, it is considered that GNI does not exist.
If the NPV equation, set to zero, does not have a non-negative solution r or has more than one such solution, then the project's IRR does not exist either.
To assess the effectiveness of investment projects, the value of GNI must be compared with the discount rate r. Investment projects with GNI > r have a positive NPV and are therefore efficient. Projects with IRR of economic evaluation of design solutions, if acceptable IRR values (depending on the application area) for projects of this type are known;
assessing the degree of IP sustainability based on a comparison of GNI and r, based on the condition that projects with GNI > r have a positive NPV;
establishment by the project participants of the discount rate r according to the data on the internal rate of return of alternative directions for investing their own funds;
IRR shows the maximum allowable relative level of expenditure for a given project.
The activities of enterprises are financed from various sources. For the use of advances in the activities of the organization financial resources the organization spends funds in the form of interest, dividends, remuneration, etc. The relative level of these costs can be called the "price" of advanced capital (YCC). This indicator reflects the minimum expenses established in the organization for the capital invested in its activities, its minimum allowable profitability, able to cover these expenses. The level of expenses for attracting investment investments (the price of the source of investment funds) is calculated according to the weighted arithmetic average formula:
where r is the percentage rate of expenses for obtaining funds for investments (rate of the price of advanced capital in fractions of a unit); i - the serial number of the source of financing; n is the number of funding sources.
The enterprise can make investment decisions, the level of profitability of which is not lower than the current value of the YCC indicator (or the price of the source of funds for this project). The IRR calculated for a specific project is compared with the relative level of investment costs. The nature of the connection is established between them:
if IRR > YCC, then the project is profitable and should be accepted;
if IRR if IRR = YCC - the project is neither profitable nor unprofitable.
For example, if the project is fully financed by a loan from a commercial bank, then the IRR value shows the upper limit of the acceptable level of the bank interest rate, the excess of which makes the project unprofitable.
It should be emphasized the incorrectness of the frequently encountered statement that the necessary and sufficient condition for the possibility of repaying a loan is the dependence r ? IRR, where r is the interest rate for the loan. In fact, for the possibility of returning a specific loan, the fulfillment of this condition is neither necessary nor sufficient.
In practical calculations of the internal rate of return (IRR), the method of successive iterations is used (search for a solution by successively replacing the values in the calculations). That is, to determine the IRR, it is necessary to choose such a discount rate r at which the NPV becomes equal to zero. The calculation can be made, for example, using the procedure "Selection of the parameter" of the application package "Microsoft Excel" or "Search for a solution" of the same PC package. However, when analyzing investment projects in which IRR does not exist, “selection of a parameter” and “search for a solution” will indicate an approximate value with an accuracy specified for a PC, which will not be the right solution if there is no such solution in calculations with determining the boundaries of the zero value of IRR.
To do this, using tabulated tables (or selection in a PC), two values of the discount rate r1 are selected
where r1 is the value of the selected (tabulated) discount rate at which f(r1) > 0 (f(r1) 0).
The smaller the interval (r1, r2), the higher the calculation accuracy. That is, r1 and r2 are the values of the discount rate closest to each other that satisfy the conditions for changing the sign of the function from “+” to “–” and vice versa:
r1 is the value of the tabulated discount rate that minimizes the positive value of the NPV indicator, i.e. f(r1) = ;
r2 is the value of the tabulated discount rate that maximizes the negative value of the NPV indicator, i.e. .
If the function changes sign from “–” to “+”, similar conditions arise with the mutual replacement of the coefficients r1 and r2.
When calculating NPV using the net present value (NPV) formula (12), as a rule, it is not possible to find a solution to the internal rate of return (IRR). This is because in formula (12) the ability to turn NPV to 0 does not depend on the discount rate r, but on the numerator of the formula (future income and costs). As the discount rate r increases according to formula (12), the internal rate of return tends to 0, but does not turn to 0. Therefore, it is not possible to find a solution to the discount rate r, at which the NPV of the project is equal to zero, which makes the calculation of IRR impossible.
Therefore, to determine the IRR (IRR), you should use the net present value (NPV) formula, in which the amount of the initial investment is not discounted (the 2nd method of calculating NPV). On the basis of this formula, we determine the IRR by the iteration method using the "Parameter Selection" procedure of the "Microsoft Excel" PC package. Thus, GNI took the value of IRR ? 0.124682. To check this equality, let's substitute the discount rate r= IRR ? into the NPV formula without discounting the initial investment. 0.124682:
million rubles
Turning NPV to zero confirms the correctness of the definition of the internal rate of return (IRR).
Exceeding the discount rate r over the value of IRR ? 0.124682 results in a negative NPV. For example, at r = 0.12469 NPV? -0.002. And vice versa, when r is less than IRR ? 0.124682 NPV becomes positive. For example, at r = 0.12467 NPV? 0.003. The given equalities also confirm the existence of the IRR for this problem and the correctness of its calculation.
In this example, the internal rate of return exceeds the discount rate:
IRR > r
(0,124682 > 0,11),
which indicates a positive NPV.
This once again confirms the effectiveness of the project.
If we calculate GNI using formula (19), then we get the same value:
The result corresponds to the previously obtained value.
As noted, the orientation of investment analysis into the future requires the right business case. Management needs to determine whether these investments will pay off and over what period they can expect financial returns from their use.
When starting to evaluate an investment project, it should be borne in mind that each project can be useful during the life cycle, which was mentioned earlier. When evaluating a project, one should compare its life cycle and the payback period of capital investments.
According to the Federal Law on Investment Activities, the payback period of an investment project is the period from the day the investment project is financed until the day when the difference between the accumulated amount of net profit with depreciation deductions and the volume of investment costs becomes positive.
Guidelines for evaluating the effectiveness of investment projects highlight a simple payback period and payback, taking into account discounting.
The payback period (“simple” payback period, “payback period”) is the duration of the period from the initial moment to the payback moment. The initial moment is indicated in the design task (usually it is the beginning of the zero step or the beginning of operational activity). The payback moment is the earliest point in time in the billing period, after which the current net income NV (n) becomes and remains non-negative in the future.
When evaluating the effectiveness, the payback period, as a rule, acts only as a limitation: among projects that satisfy a given limitation, further selection should not be made according to this indicator.
The payback period, taking into account discounting, is the duration of the period from the initial moment to the payback period, taking into account discounting. The payback moment, taking into account discounting, is the earliest point in time in the billing period, after which the current net discounted income NPV (n) becomes and remains non-negative in the future:
The payback period can be calculated using the formula:
,
where CI is the initial (net) investment,
- the average annual balance of the total cash flow;
– average annual income from investments;
– average annual costs associated with the investment process.
As a result, we obtain the number of years required to return the initial investment and costs.
The number of years required to return the initial investment is also called the payback point. However, the used investments should not only pay off, but also bring income not lower than the interest on savings deposits. Otherwise, there is no point in investing in the project. In general, the payback period shows how long the project will bring profit.
If the payback period (payback point) and the life cycle of the investment project coincide, then the organization will not receive a profit on these investments and will not incur losses (except for hidden losses from the missed opportunity to use investments in a more profitable project or opportunity costs).
If the life cycle period is below the payback period, then the project will be unprofitable. If the period of life of the capital investment object exceeds the payback period, the project will bring profit.
Thus, the payback period of investments must comply with the condition of the expression:
,
under which
,
where n is the calculation step in the billing period of the investment;
k is the number of calculation steps n in the payback period Ti
The average annual balance of the total cash flow according to the given example:
million rubles
Average annual costs associated with the investment process:
million rubles
Then the payback period of the investment according to the example:
of the year
The calculation shows that this investment project will pay off in 2.5 years.
