Every company wants to earn money. It’s as simple as that. Of course, there are some non-profit organizations, but their idea of functioning is completely different. In the commercial world, it’s all about how to generate cash flows and the market value of your investments. 

In this article, we will discuss the idea that can help you organize your cash flow statement – a DCF model template. What’s that? Well, it stands for discounted cash flow, and it’s a financial model that will help you estimate the exact value of your investment or a company and grant you some insight into how you can organize your free cash flows for future endeavors. 

Is it interesting? Additionally, we have prepared for you some free discounted cash flow templates that you can use for this particular task. And we will also go over some of the key elements to know about this topic. So, if you want to generate cash flow more effectively and get the actual value of your company’s intrinsic cash flow, you have come to the right place! Let’s dive in!

DCF, as previously explained, stands for "Discounted Cash Flow." It’s a method used for estimating the exact value of an investment/company, and project, based on the information you put in the model, potential profitability, and long-term success. Additionally, expected future cash flows can be modified. It means that you can use the DCF valuation method and put in different factors in order to change the outcome of your analysis. Those factors are not set in stone, so be aware of that.

How does it work? There is a specific formula for calculating the discounted cash flow model, but it does not consider all the necessary variables before putting them all in. If you want to find out the real company value, there are plenty of other economic factors to take into account before even putting those into the model. 

DCF is a forecast with plenty of possibilities. For example, it will show you the risks associated with the particular choice of action and the potential cash flows that can come from the investment. 

Here you can find the specific formula that you can use to calculate the discounted cash flow model.

Of course, all of our templates have this formula within them. Nevertheless, to better understand what it includes, we have prepared for you this graph. So, now that we know what we are talking about let’s go over some valuable terms, as it can get a little confusing if you miss out on those.

A Discounted Cash Flow model includes many professional-sounding financial terms that may not be as basic for most people as they are to people in the field of economy. To address that issue, we have provided you with a short “dictionary” to help you understand all the intricacies of the Discounter Cash flow. 

These terms are essential to understanding not only the DCF valuation that we will get to in the latter part of this article but also a broader scope of financial analysis that you can use in your company and your everyday life. 

• Free Cash Flow (FCF) – it is an essential financial tool that can help you in estimating the company’s, project’s or investment’s cash flow. You will be then able to see how you can use this generated cash for many different reasons, like paying dividends to stakeholders, settling debts, or reinvesting in prospective growth prospects. In this particular DCF model, Free Cash Flow is a way of evaluating the value of an investment. 

• Discount Rate – is a required rate of return or cost of capital. It means that it is the minimum return that you, as a company, team leader, or an investor needs to get back in order to justify the risk you are going to take with the planned investment. In this particular model, discount rate is used in order to discount future cash flows in order to present their real value, considering the time value of money and the risk associated with the investment.

• Terminal Value – it’s the overall worth of all of the incoming cash flows beyond the specified projection. That would mean all the future cash flows that can be estimated. In most cases, DCF has a forecasting period, so this value would mean all the revenue that you will get beyond the “terminal” moment. 

• Present Value (PV) – this means the current value of a future cash flow, meaning, the value of all the cash flows you will be receiving in the future, but with a discounted rate applied to them. That way, you will be able to see the comparison between different cash flows at various points in time.

• Net Present Value (NPV) – another important term is the net present value. This is the difference between the present value of all the potential inflows and outflows of cash. If this particular factor is positive, your investment will give you some returns. If it’s negative, you should reconsider your strategy. 

• WACC (Weighted Average Cost of Capital) – this is the average cost of equity and debt in your company or of the project/investment. It is usually presented against the proportions of the overall finance situation of the company or an investor. This factor will show you the average cost of funding the company's/investment activities and can also be considered a discount rate in the DCF model.

• Growth Rate – this presents the anticipated speed of your future cash flows during the projection period. It is mostly used to evaluate the validity of the investment and present the potential for growth with that particular investment/project. 

• Terminal Growth Rate – similarly to the terminal value, the Terminal Growth Rate is the growth rate after the projection period. It’s one of the most important elements when it comes to calculating anticipated long-term growth, as it will show you how valid the investment can be even beyond the planned period.

But before diving into the specifics of the DCF templates, let’s review some of the software we will use for this project. Regarding financial documents, you cannot take any risks whatsoever. And in this case, you will need a powerful and precise tool that will be easy to navigate and capable of performing complex calculations. For that, we recommend using the Microsoft Office suite.

Millions of people worldwide are using Microsoft Office in their everyday lives with success, and it’s a great testament to why it’s such a powerful and reliable tool. And, if you would like to send your files somewhere, transfer them from person to person, or just overall – show something to your coworkers with the Microsoft Office Suite, you can do that with no issues whatsoever.

Additionally, this package comes with many different programs that you can use in your everyday work, from powerful Microsoft Excel spreadsheets to PowerPoint presentations, ending with, arguably, the best text editor on the market, Microsoft Word; you will gain access to multiple and advanced productivity tools for many purposes.

With the clever use of templates like those we have provided for you below, you will be able even further to extend the possibilities of this program. 

And it’s not that expensive anymore! Considering that you can get Microsoft Office Key at Royal CD Keys for just a few dollars with a lifetime subscription, it’s a no-brainer. So, with that in mind, let’s find the best Excel template for your financial modeling needs.

Discounted Cash Flow Template #1

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First, we have the discounter cash flow template for taking on your operating income. The discount factor is heavily emphasized here, as you will quickly notice that the Net Present Value bracket is where the action takes place. This template is for all the people who need a reliable tool for multiple different scenarios. Whether those would mean taking the total value of a preferred stock price, or finance leases, you can see different assumptions for each bracket.

Discounted Cash Flow Template #2

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The following cash flow template on our list is essential, showing you a simplistic view of the DCF model. It’s great for a small company or a basic project that needs to evaluate if it would benefit the whole company. If you need to do something efficiently, this template is for you.

Discounted Cash Flow Template #3

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And finally, we have the DCF template to rule them all. This is the epitome of the DCF model, which comes with graphs and differentiation between market value and intrinsic value; it’s a balance sheet to put an end to all the others. What makes it stand out is the scope of this template, as it provides you with complex data analysis that you did not know was humanly possible. So, if you need to get your net working capital into action, this will help you in that endeavor.

So, now that we have seen all the ways you can create your very own DCF model with our template, let’s see what elements should be included. It’s an essential tool that can support the decision-making process, providing insights based on many different inputs from the financial analysis. 

Of course, things like cash flow projections and discount rates are well-researched and, in most cases, realistic. However, you should always check them once more with your very own eye to ensure you have all the factors within your grasp. And now, let’s go over some of the most essential elements to remember in creating your DCF model.

Project Future Cash Flows

The initial task at hand is projecting future cash flows. It’s the most crucial step in the financial process, sparking the whole thing. The critical consideration here is conducting a comprehensive analysis. This entails estimating revenue sources, accounting for all operating expenses, potential taxes, and capital expenditures throughout the explicit forecast period. A thorough understanding of the industry is essential, examining the market conditions that may impact decision-making and grasping growth prospects.

Determine the Discount Rate

The next step is to identify the discount rate, which plays an essential role in the DCF model. It represents the required rate of return or cost of capital necessary to offset the associated risk. The discount rate quantifies the potential returns and determines if they warrant the risk inherent in the investment or project. 

It is crucial to evaluate the investment's risk profile, as it can make or break the project as a whole. Key factors to consider include the risk-free rate, market risk premium, and industry-specific risks.

Calculate Present Value

Next, you need to calculate the present value while applying the discount rate we have mentioned before. Be sure to discount each projected future cash flow back to its current value, as the money available today is much more valuable than your projected benefit in the future. 

If you do it correctly, this process can transform your future cash flows into their equivalent values in today's terms. How do you do that? You should consider factors like the time value of money, tax rate that can potentially change, operating leases, inflation, opportunity costs, and risks mentioned above.

Obtain Net Present Value (NPV)

Next, you need to do the Net Present Value (NPV). It’s one of the most critical metrics in the DCF model, as it will allow you to see if you will be making money from your investment. If you don’t remember what NPV means, you can return to our dictionary at the start of the article. 

Sum up all the discounted future cash flows and deduct the initial investment or cash outflow. If the NPV turns out positive, it means a potentially profitable investment is to be made, as the total present value of expected cash flows exceeds the initial investment. On the other hand, if you have a negative NPV, your investment is probably not financially viable, as the expected cash flows fall short of covering the initial cost.

Evaluate the Investment

And finally – interpret the NPV result to make an informed and profitable investment decision. You need to remember, though, that this is not “rocket science,” and a positive NPV result does not mean that your investment will bring you money back. 

You need to consider all the factors before jumping to conclusions. Those would entail taking the investment's risk, industry trends, and market conditions into consideration as well. On the other hand, as we have mentioned before, if you have a negative NPV, you should be cautious and maybe change things here and there, not completely abandon the idea. The financial world operates on speculation, so you can always turn the profit inside out for yourself.

Now that we know the Discounted Cash Flow (DCF) analysis and what we should include in such a document, let’s go over some of the benefits it can provide to you and your company. There are myriad advantages in financial valuation and decision-making processes that can come from utilizing this tool. 

Still, we will review the most common ones to keep it brief. It can grant you valuable insights into your investments' worth and potential profitability and get you some additional data for future analysis. Let’s go over some of the key elements to keep in mind when talking about DCF benefits.

Forward-Thinking Approach

The first thing to remember is the forward-thinking approach that DCF analysis provides. By projecting the future cash flows of an investment, company, or project, this kind of analysis inherently focuses on the future and the company's growth potential. This forward-looking perspective can allow investors and businesses to see an investment's long-term profitability and value to get into the strategic planning phase.

Precise Valuation of Cash

Next, we have the precise cash valuation that comes with the DCF projections. By considering the time value of money, based on the inflation, tax rates, and factors mentioned above, DCF shows that the money available today is more valuable than the same amount in the future. So, discounting future cash flows to their present value can give you a more accurate representation of your investment's current worth in reality rather than what it could be in the future. That way, it can further enhance decision-making and help you strategize.

Effective Risk Management

The next thing to remember when discussing DCF benefits is effective risk management. By incorporating risk into the analysis of your potential investment, DCF can allow you to adjust the discount rate based on the abovementioned risk factors. 

You will be able to make informed decisions that will align with the return expectations and potential tolerance for risk. That way, it will be possible to ensure that your investment is in line with the risk-reward expectations of stakeholders. 

Versatility and Adaptability

The next thing to remember is the versatility and adaptability aspect of DCF. The main benefit is that the DCF analysis is highly flexible and applicable to many types of investments, projects, and even industries. With so many other sectors of the economy, it’s a remarkable opportunity for most investors to foresee if their project is potentially profitable or if it is a dead concept with no future for it.

Data-Driven Decisions

Of course, the data-driven decision-making process is a critical element of DCF analysis. With a quantitative framework, this kind of analysis can help you evaluate investment opportunities based on complex data, like the projected cash flows and financial metrics we have spoken of before. This kind of data-driven approach can reduce the influence of subjective human opinions and biases that some stakeholders can have and enable you to create an even more significant impact on the financial market.

Comprehensive Assessment of Investment Potential

DCF analysis allows you also to make a comprehensive assessment of investment potential. It’s not hard science, as we have mentioned before, but it’s also not clairvoyance. If you consider all the hard facts of the matter, like the relevant cash flows encompassing revenues, expenses, and capital investments, you will have a comprehensive view of the investment's potential profitability. 

Sensitivity Analysis

Additionally, it can help you in employing sensitivity analysis for your company/investment. A well-drafted DCF can allow investors to explore the different scenarios of their investments. By changing the assumptions on the evaluation, like differing growth rates or discount rates, stakeholders can gain insight into the investment's sensitivity to key factors, enhancing the decision-making process. It will also allow them to better understand the decision-making process so that they would make even more informed decisions in the future.

Ideal for Long-Term Investments

Additionally, a DCF analysis is great for long-term investment decisions. It can provide you with some sustainable growth and return potential for many years to come. DCF analysis presents the complete lifecycle of an investment. It considers many different factors, as we have mentioned before, so you will be able to see the evaluation of the investment's long-term viability and potential.

Facilitates Side-by-Side Comparison

And finally, with DCF analysis, you will be able to compare the value of many different investments or projects based on their projected cash flows and returns. This side-by-side evaluation enables efficient prioritization and allocation of resources. As with everything, you will rather invest in something that will return you some money rather than a long shot that may not even happen in real life.

And here we are, at the end of our road. Thanks for checking out our article on the different ways a DCF template can help you in revenue growth. Most companies utilize this kind of calculation, as it benefits them greatly in the long run especially when it comes to creating some long-term plans for the investment possibilities of the company. As usual, if you liked this article, be sure to check out others on our site. We have a lot of those to go through, so we are positive that you will find something to your liking. Thanks for stopping by, and we will see you in the next one.