Discounted cash flow is one of the tools that can be used in strategic management for your company. Know its importance and how to compute it!
Most entrepreneurs aim to bring a company to the next level of growth or attract new investors to the operation. Therefore, know that tools such as DCF can be used in pursuing these goals.
This calculation is relevant for conducting growth projections for an organization and defining its market value. In addition, the DCF is a metric that can assist in the financial and accounting management of the company.
But do you know how the indicator works? Read this article to understand what discounted cash flow is, what it is for and how to calculate it!
What is cash flow?
In essence, it will be interesting to tackle the concept of cash flow . Of course, any company has the element of its financial management present in it. This is mainly because it is possible to very closely monitor the numbers, thereby defining objectives, and contributing towards the decision of managers.
In this context, cash go with the flow is chargeable for tracking the inflows and outflows of the employer’s coins on a normal foundation. Thus, it is a applicable device for providing a clean view of its economic fitness.
What is discounted cash flow?
Knowing the which means of cash flow, it’s far less complicated to apprehend discounted cash flow. This is a tool used to outline the intrinsic cost of a business.
To do this, the DCF considers the company’s cash flow projections. In other words, based on the organization’s current characteristics, it is possible to estimate how much it will be able to move in the coming years.
However, it must be noted that the value of money changes with time because its purchasing power changes. After all, factors such as inflation and interest rates have a direct influence on this aspect.
So the discounted cash flow stands out for showing how much the projection is equivalent to today. To make this possible, a discount rate is considered on the amount found in the estimate.
So, as you have seen, cash flow is responsible for monitoring the financial movements in the company’s cash flow. In turn, the DCF makes an analysis for the coming years and translates it to the current context.
What is the FCD for?
Do you understand the concept of discounted cash flow? Then it’s time to see how it can be used in your company.
Check it out!
Projections for the future
Every company, regardless of its size, starts with an investment from its partners. In view of this, it is interesting to conduct projections to understand when the capital injection will be able to “pay for itself” — that is, return the amount invested.
The DCF contributes to this vision. It will make projections of cash flow for the future and, based on them, translate these amounts into present value. This way, you will have a clearer perspective on resource generation.
Company Valuation
Discounted cash flow is also a relevant tool for investor analysis. In publicly traded companies, it is common for investors to make projections in order to understand their valuation and determine whether the price of their shares is fair.
DCF can be useful for those businesses that are not listed on the stock exchange but are in need of a capital injection. In this way, investors can utilize the discounted cash flow to assess whether investing in the organization would be worthwhile.
Why is it important to do the FCD in your company?
As you have seen, calculating discounted cash flow is a tool that can contribute to your company’s financial management. After all, it allows you to make estimates that can be advantageous for your business strategy.
For example, it will allow you to predict whether a given investment will be beneficial for the business’s results in the medium and long term. This is because it will be possible to compare estimates and analyze which one has the best potential for the company.
Additionally, your discounted cash flow information can be important in guiding business growth. Since it will act as a benchmark for your results, you can make more effective decisions to achieve them.
However, it is essential to remember that the DCF is a projection. Therefore, there are elements that can impact the estimate in the period. Therefore, when you implement the indicator in your company, try to be realistic in the numbers used and, when possible, conduct new analyses.
As you have learned, discounted cash flow is an instrument that helps to project results and define the market value of the company. Now that you know how it works, you can implement DCF in your business in a strategic way.