Tag Archive : cash flow

What is Financial Freedom?

What Does Financial Freedom Mean To You?

Introduction

India is celebrating its 72nd Independence Day tomorrow on 15th August 2019. So Lets discuss about what is financial freedom or financial independence from personal finance perspective. What Does Financial Freedom Mean To You?

What is Financial Freedom?

  • As we all know, India got the freedom on 15th August 1947. This freedom was an outcome of sacrifices made by great leaders.
  • In the same context, for investors, financial freedom will come at the cost of years of savings and tactical investments to create wealth.
  • Financial independence is about taking ownership of your finances. You have a dependable cash flow that allows you to live the life you want. You aren’t worrying about how you’ll pay your bills or sudden expenses. And you aren’t burdened with a pile of debt.
  • It’s about recognizing that you need more money to pay down debt and maybe increasing your income with a side hustle – we’ll get to that in just a minute. It’s also about planning your long-term financial situation by actively saving for a rainy day or retirement.

Key Features of Financial Freedom vs Debt

What is Financial Freedom?
What is Financial Freedom?

What Does Financial Freedom Mean To You?

  • How about you being able to celebrate your own Independence Day or your Financial Independence Day to be more precise.
  • What Does Financial Freedom Mean To You? Does earning a big salary mean financial Freedom? In spite of having a high salary, why people many a times feel cash strapped when some emergency strikes? 
  • The answer is simple for those who understand the difference between income and wealth, and how to create it manage to be financially independent.
  • Also we need to value money for what it is and look at the money positively as an investment or savings than as a expense.
  • Income is merely the flow of money that enables you to meet your day to day expenses, provide for your living, some leisure and wants to be able to survive.
  • Whereas wealth is an outcome of what you do with the income and how well you accumulate and improve your financial strength to be able to sustain for a long term.
Financial Planning
Financial Independence and Investing
  • According to financial goals or objectives, Investing is the right way to achieve financial independence.
  • Apart from the traditional investment options, experts are of the view that equities alone can get you the financial independence.
  • Investing is not a one-time activity but more of a continuous process. The investment methodology will be different when you start investing in your 20’s and will change when you turn 40 and later on towards your retirement age, above 60’s.

Conclusion

In short, financial freedom is when you don’t have any kind of financial stress or any worries. Your investments are in the right place and are in a position working hard for you.

What is free cash flow?

What Is Free Cash Flow (FCF)?

Meaning & Calculation

Introduction to Free Cash Flow

While analyzing a company we give a lot of importance to the Net Profit of the company. No doubt that it is an important factor, but Free cash Flow is an equally important factor. In this article, we are going to discuss what is free cash flow?

Like some analysts look at Earning Per Share (EPS), similarly one can analyze the company using Free Cash Flow Per Share. Free Cash Flow is specifically important for those companies in capital intensive businesses. It is also of importance for analysis of the companies which have high debt.

Thus, while analysis of a company free cash flow should also be given weightage. Free Cash Flow should always be positive. In some years it can go negative but there will obviously be reason behind it and shouldn’t be repeated.

Analysis of Free Cash Flow

  • One should track Free Cash Flow Year-on-Year, that is should only be looked at when the final numbers for that year of the company are declared.
  • It is not useful to analyse it in between or on quarterly basis as a lot of changes can happen during the whole year.
Free Cash Flow
Free Cash Flow

Calculation of Cash Flow

Following are the steps of how cash flow can be calculated.

1. Cash From Operating Activities

Important Factors under this:

  • Operating Profit – It is the nothing but the cash generated from the core activities of the company. Here, only the cash already received is taken into consideration and not the cash to be received. You cannot bank on receivables in this case. This is added to the cash flow.
  • Working Capital – Working capital is nothing but the amount received after subtracting the amount of current liabilities from current assets. One should look at Changes in the working capital also. If the changes are positive then add them, but if negative then subtract them from the cash flow.
  • Taxes – Here, both the tax on profits as well as dividend distribution tax are to be included. They get reduced from the cash flow.

Working capital might go negative sometimes when the current liabilities exceed the current assets. And obviously one pays taxes if there are profits. But, in the end, Profit from Operations should always be positive.

2. Cash From Investment Activities

Important Factors under this:

  • Fixed Asset Purchase – When a company buys fixed assets, liquidity of the company gets used up. This doesn’t happen every year, but when it does, that time it is a negative entry in the cash flow.
  • Fixed Asset Sale – When a company sells fixed assets, liquidity of the company gets goes up. Here, the cash flow will become positive as the cash from sale comes into the account.
  • Investment Purchase – If there is liquidity available with the company, the company, for example, can park those funds in liquid funds or in fixed deposits. This is regarded as investments purchased. This factor again reduces the cash flow.
  • Investment Sale – When the maturity of an investment is reached or the company redeems the investment, that time the cash comes into the account and is added to the cash flow.

If there is purchasing activity then there will be a outflow in cash flow, and for selling activity then inflow in cash flow takes place.

Mutual Fund Review E Books
Detailed Mutual Funds and Stock Market Review E Books by Yadnya

3. Cash From Financing Activities

Important Factors under this:

  • Loans Taken – Here, the money will be added to the cash flow.
  • Loans Repaid – Money from the cash flow will go out.
  • Interest Payment – If a loan is taken, then interest would have to be paid on it. When interest is paid, the amount is subtracted from the cash flow.
  • Dividend Paid – If a company pays dividend to its shareholders, then the amount is subtracted from the cash flow.

Summary

  • In the end, when all the addition and subtractions entries are the done, the amount that is received if positive is termed as Positive Free Cash Flow and if in minus then is termed as Negative Free Cash Flow.
  • Continuously negative free cash flow is definitely not good and is an alarming sign. It can be acceptable if it is just a hiccup and does not get repeated again and again. It can happen when certain purchases or investments are made in that year.
  • Investors, such as Warren Buffet, rely heavily on free cash flow.
  • Therefore, it is very important for a company to have positive FCF. Also, companies in capital-intensive businesses and companies with high debt should not consistently have Negative FCF.

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