Question

Analyze the differences among accounting profit, operating cash flow, net cash flow, and free cash flow.

Identify the key stakeholders in cash flow planning and profit estimation processes in the organization, and explain how they are involved in the processes.

Analyze the impact of accounting profit, operating cash flow, net cash flow, and free cash flow concepts on decisions in the organization for which you currently work, one that you would like to work for in the future, or a small business you hope to start one day.

Answer 1

Differences among these terms:

Accounting Profit:It is a total earning of a company as per GAAP, after deducting operating cost(Depreciation,interest,taxes).Therefore, it is a net income earned afetr deducting all dollar cost from its total revenue.Derived from Company's Income Statement.

Operating Cash flow:It is the amount of cash generated by operations of the company.This amount tells about cash earning, further cash may required for any project or any financing/borrowing required from any financial agency.

Free Cash Flow: It is the amount of cash which is available with the company after meeting all capital expenditures i.e expenses for assets of company.It tells about Financial health and performance of company.It is available to common stakeholders also.It can be used for valuation of company or its equity/Capital structure.

Key Stakeholders and their Involvement:

Project manager: He is a main stakeholder(Internal Stakeholder) of the company to whom vests project planning and its operation.he will determine what cash flow will be generated by project in future and what profit level can be expected from the project.

Finance Manager:He will determine exact/approx figures of Net cash flow or NPV for project's acceptance final decision from different financial and accounting tools.

Shareholders: they are the owners of the company, so any project acceptance and its rejection lies finally to shareholders who are ultimate authority to decide.Project;s profit calculation is vested to Finance deptt. but role of shareholders cannot be dimnished.

Government:taxes levied by them can be imcreased or decreased and it can surely upset decision regarding future cash flows and profit from it.Cash flow planning is done keeping normal and stable tax rates and economic policies

Financial institution: Major and most projects are taken up on borrowings from Institution, and any change in interset rate, tenor of funds, conditions attached to funds,may lead to project rejection.

Analyze Impacts:

Accounting profit:After having Gross revenue from operation of company, operating and non-operating expenses are deducted from it to arrive at accounting profit.this is a book profit which is shown in Income statement and finally goes to Free reserves.

Operating cash flow: This amount will determine sufficient amount for operations of company or whether it requires external financing or not.From cash flow statement we can easily determine operating cash flow.Direct and indirect method of GAAP rules are used to calculate this.

Net cash flow: It is a difference between Cash inflow and cash outflow.It shows change in company's cash balance from cash flow statement.Net Present Value can be calculated by using Present value concept of net cash flow.

Free cash flow:it is the aount which is net of all working capital and fixed capital and also any capital expenditure.If excess cash is determined, then only we can detremine to expand production, develop new products, to pay dividends etc.If it has negative FCF, then it means that company is making high investments which may generate high incomes and profits for company in future.