2. AgendaWhy cash flow isimportant Statement of Cash FlowsFree Cash Flow (FCF) and FCF ConversionLong Term FinancialMetrics 3. Definition: Cash Flow A revenue or expense stream that changesa cash account over a given period. Cashinflows usually arise from one of threeactivities - financing, operations or investing- although this also occurs as a result ofdonations or gifts in the case of personalfinance. Cash outflows result from expensesor investments. 4. Why cash flow is important Managing cash flows helps ensure long-termviability Ensures liquidity exists when times get tough Allows for the freedom to make investment decisionsthat will benefit the company Companies can show increases in earnings notrelated to cashAll we care about is how much cash a businessis likely to produce between now and judgment day -Warren Buffet 5. Income Statement Versus Cash FlowSeptember Income Statement Differences can Revenue1,000 include: Cash received for Expenses 750sales vs. AR Operating Income 250balance Expenses paid vs.September Cash ImpactAP balanceRevenue 800 AccrualsActual Cash Expenses375 DepreciationOperating Income425 6. Why cash flow is importantMarket Comments Cash Management is Valued We expect cash generation to be a key driver of performance among the best-in-class industrials. GoldmanSachs The flight to quality mindset that caused banks flight to cashhas also translated into the equity world as a demandincreases for companies with proven cash flows CreditSuisse companies with strong balance sheets, free cash flow, andtrustworthy management will do much better in this market.Integrity as a whole will be a commodity in the coming yearsas distrust in the system permeates. Market Watch Four of the top five fund managers list strong cash flows andclean balance sheets among the most important stockinvestment criteria Fortune Cash Remains King 7. AgendaWhy cash flow isimportant Statement of Cash FlowsFree Cash Flow (FCF) and FCF ConversionLong Term FinancialMetrics 8. Statement of Cash Flows Purpose Cash in, Cash out Three Sections 1. Operating activities 2. Investing activities 3. Financing activities 9. Operating ActivitiesTwo methods of reportingOperating Section 1. Direct Shows actual cash disbursements and receipts Only used by 3% of companies 2. Indirect Net Income is adjusted for cash and non-cashtransactions (Accruals, Deferrals,Depreciation/Amortization) Most common approach among largerbusinesses 10. Operating Activities Cash generated by normal business operations Changes in inventory, accounts payable, accounts receivable balances Impact of depreciation Impact of prepaid or deferred expenses 11. Operating Activities Cash from operationsAsset/Liability change reference CategoryBalance Sheet Change Cash Flow Impact Asset AssetLiabilityLiability 12. Investing & Financing ActivitiesInvesting Cash Flows: Purchases and sales of fixed assets and software Cash activity from selling or acquiring business Cash used or received from the sale or purchase of investments or marketable securitiesFinancing Cash Flows: Cash activity from borrowing or retiring debt 13. Company ABCConsolidated Statement of Cash Flows20112012 ChangeCash Flows from Operating ActivitiesIncrease/(Decrease) in Net Assets (1,920) 3452,265Adjustements to reconcile change in Net AssetsDepreciation86 77 (9)(Increase)/Decrease in contracts and grant receivables 1,194(1,901) (3,095)(Increase)/Decrease in prepaid expenses (5) 06(Increase)/Decrease in deferred assets35 - (35)Increase/(Decrease) in account payable and accrued expenses 92 2,079 1,987Net Cash flows provided by Operating Activities (518)599 1,118Cash Flows from Investing ActivitiesFixed Asset purchases(14)(3) 11Net Cash flows provided/(used) by investing activities (14)(3) 11Cash flows from financing activitiesNet cash flows provided/(used) by financing activities(751) (321) 430Net Change in cash and equivalentsNet Increase/(Decrease) in cash (1,283)596 1,880Cash and equivalents, beginning of fiscal year 2,148 1,530(618)Cash and equivalents, end of fiscal year8652,126 1,261 14. AgendaWhy cash flow isimportant Statement of Cash FlowsFree Cash Flow (FCF) and FCF ConversionLong Term FinancialMetrics 15. Free Cash Flow Cash From Operations Is Not EnoughFails to account for the cash a company must spend toreplace its capital investments as they depreciate Free Cash Flow is the remaining funds after payingout all operating expenses and replenishingfactories/equipment/etc. as they wear out 16. Free Cash FlowStrong Free Cash Flow Provides OpportunitiesFree Cash Flow AdditionalNet Debt &Special ProjectsContributions Investments RetirementMaintenanceBenefits Strong Free Cash Flow: Essential to Strategy & Future Opportunities 17. Key TakeawaysWays to improve cash flow Improve Operating Income Create efficiencies/ eliminate Low Value added tasks Ensure over the long term Revenues grow at a fasterrate than costs. (Effective Cost control). Reduce Operating Capital Costs Use equipment and machinery more effectively Eliminate unnecessary assets Reduce working capital Reduce inventories where appropriate while stillmeeting customer needs Reduce customer terms where appropriate toaccelerate receivables Negotiate longer payable terms where appropriate 18. AgendaWhy cash flow isimportant Statement of Cash FlowsFree Cash Flow (FCF) and FCF ConversionLong Term FinancialMetrics 19. Long Term Financial Metrics Every company, for profit and not for profit, has amission, vision and overall strategies How do you measure your success on thesestrategies? Financial metrics and tools help you determinewhether or not you are reaching your goals andstrategies Long Term Financial Metrics are tools to help youassess the status of your overall strategies This can be done on a quarterly basis or annual basis Comparing to other companies in your industry 20. Long Term Financial Metrics: Examples Tracking Event Increases/Revenue Growth ROI/ROA Expenses to Revenue should be ~1x or less Asset Use AR Turns: Sales/AR Days Sales Receivable: 365/Receivable Turnover Short Term Current Ratio: (Current Assets/Current Liab) Long Term Cash Coverage: (EBIT + Depreciation)/Interest # of months cash on hand Surplus/Deficit as a % expenses 21. Thank you!
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