One of the most important aspects of your client’s business is cash flow. Without money, it can’t run its business. While it’s important to track the current amount of money on hand, it’s equally important to guess how much cash your client will receive in the future. An easy way to do this is by looking at discounted cash flows (DCF).
DCF analysis takes a look at money when it’s received. The timing is important because money is worth more presently than in the future. If your client gets $10,000 today, it can invest that $10,000 and grow it. If it’s promised the same $10,000 but won’t get it for another year, it’s lost out on the chance to grow it. Based on the timing of cash flows, the value of money changes.
Your client won’t use DCF on its financial statements as the analysis is an internal evaluation technique used for making business decisions. Some common tools that use DCF are internal rate of return or net present value. The general rule is the smaller the DCF, the less cash flow value. If your client calculates two DCFs of $50,000 and $75,000, the $75,000 project is more valuable as it will result in more money.
Help your client select the right rate to use when performing DCF and predict the timing of when cash will be collected as this is a central part of DCF analysis. It’s difficult to guess what’s going to happen in the future, but this tool offers a way for your client to see the true value of the cash it’s expecting to receive.