idity = Short term liabilities The term cash flow describes the flow of money going in and out of a company. Payment coming in could be from sales, banks giving loans, owners etc. Payments going out could be salaries to employees, interests and repayments on loans, payments to suppliers or subcontractors. ASSETS LIABILITIES How the capital is used How the capital is supplied Fixed assets Owners equity Current assets Long-term liabilities Short-term liabilities Total assets Figure A2.3 Balance sheet Understanding Changing Telecommunications - Building a Successful Telecom Business Negative Cash Flow More money is going out than coming in to a company. Positive Cash Flow More money is coming in than going out of a company. Net Cash Flow Consists of the net effect of cash inflow and cash outflow. BUSINESS INVESTMENTS Corporate Policy for Investment Analysis A corporate policy should normally be developed centrally and issued throughout the company. It should prescribe the types of financial analyses required to justify investment pro- posals, for example that all capital expenditure proposals be supported by discounted cash flow (DCF) studies. The corporate policy also sets the discount rate to be used, prescribes methods to consider inflation, and the need for sensitivity and risk analysis. Evaluation Methods Another possible heading would be indicators of merit. In this appendix only the pure, short-term economical factors are used. Intangible effects such as goodwill, references etc. are not considered. It should in other words be recognized that there are other criteria than maximizing profits that a company may adopt, in determining whether to invest: The return on investment (ROI/or accounting rate of return (ARR)) The payback method Discounted cash flow (DCF) methods The net present value (NPV) The internal rate of return (IRR) Earnings before interest, taxes, depreciation and amortization (EBITDA) ACCOUNTING RATE OF RETURN (ARR) Compare the estimated ARR of a proposed investment/project with the target ARR. 