The Financial Planning ProcessThe Financial Planning Process

LiquidityLiquidity Working CapitalWorking Capital InventoriesInventories Capital BudgetingCapital Budgeting Capital StructureCapital Structure DividendsDividends

A firm’s financial plan involves decisions about:

3 Rules of Financial Management3 Rules of Financial Management

What are the three primary rules of successful financial management?

3 Rules of Financial Management3 Rules of Financial Management

1.1. Get the cashGet the cash

2.2. Get the cashGet the cash

3.3. Get the cashGet the cash

What are the three primary rules of successful financial management?

The Cash Plumbing SystemThe Cash Plumbing System

Equity

LT Debt

Taxes

Dividends

The Cash Plumbing SystemThe Cash Plumbing System

Equity

LT Debt

Taxes

Dividends

The Cash Plumbing SystemThe Cash Plumbing System

Equity

LT Debt

Taxes

Dividends

The Cash Plumbing SystemThe Cash Plumbing System

Equity

LT Debt

Taxes

Dividends

The Cash Plumbing SystemThe Cash Plumbing System

Equity

LT Debt

Taxes

Dividends

The Cash Plumbing SystemThe Cash Plumbing System

Equity

LT Debt

Taxes

Operating

Expenses

Dividends

The Cash Plumbing SystemThe Cash Plumbing System

Equity

LT Debt

Taxes ST Debt

Mkt’l Sec

Operating

Expenses

Dividends

The Cash Plumbing SystemThe Cash Plumbing System

Equity

LT Debt

Taxes ST Debt

Mkt’l Sec

Operating

Expenses

Dividends

Fixed

Assets

Materials/Inventory

Finished Goods

Accts Pay’l

Labor

The Cash Plumbing SystemThe Cash Plumbing System

Equity

LT Debt

Taxes ST Debt

Mkt’l Sec

Operating

Expenses

Dividends

Fixed

Assets

Materials/Inventory

Finished Goods

Accts Pay’l

Labor

The Cash Plumbing SystemThe Cash Plumbing System

Equity

LT Debt

Taxes ST Debt

Mkt’l Sec

Operating

Expenses

Dividends

Fixed

Assets

Materials/Inventory

Finished Goods

Accts Pay’l

Labor

The Cash Plumbing SystemThe Cash Plumbing System

Equity

LT Debt

Taxes ST Debt

Mkt’l Sec

Operating

Expenses

Dividends

Fixed

Assets

Materials/Inventory

Finished Goods

Accts Pay’l

Labor

The Cash Plumbing SystemThe Cash Plumbing System

Equity

LT Debt

Taxes ST Debt

Mkt’l Sec

Operating

Expenses

Dividends

Fixed

Assets

Finished Goods

Accounts Rec’l

Materials/Inventory

Accts Pay’l

Labor

The Cash Plumbing SystemThe Cash Plumbing System

Equity

LT Debt

Taxes ST Debt

Mkt’l Sec

Operating

Expenses

Dividends

Fixed

Assets

Finished Goods

Accounts Rec’l

Materials/Inventory

Accts Pay’l

Labor

Estimating Cash FlowEstimating Cash Flow Since the Income Statement does not

give us the firm’s cash flow, how do we back it out of the statements that are provided?

Statement of Cash FlowsStatement of Cash Flows

Cash flow from Cash flow from operationsoperations Cash flow from Cash flow from investinginvesting Cash flow from Cash flow from financingfinancing

The 3rd primary statement is an estimate of cash flows for the company:

Statement of Cash FlowsStatement of Cash Flows

Positive Net Income less cash Positive Net Income less cash dividends paid = Change in dividends paid = Change in Retained Earnings (plus Retained Earnings (plus depreciation because it is a non-depreciation because it is a non-cash expense)cash expense)

A A DECREASEDECREASE in any in any assetasset (gross, (gross, not net, for fixed assets)not net, for fixed assets)

An An INCREASEINCREASE in any in any liabilityliability or or equityequity account (except retained account (except retained earnings because it was included earnings because it was included above)above)

Positive cash flow comes from:

Statement of Cash FlowsStatement of Cash Flows

See the example spreadsheet for Chapter 2