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7-1
Cash Flow Management
Dr.Hiren Maniar
7-2
Cash Flow
Cash is KingLife blood of businessCash flow related financial reports are
most important (even more important than Income Statement)
Understand cash versus accrual
7-3
Cash Flow
Business
Cash In
Customers
Products / Services
Cash out
PayrollInventoryUtilitiesRentTaxesInterestsLoansEtc.
Equity and/or Debt financing
7-4
Cash Flows
Cash Outflows Cash InflowsInitial Investment Incremental RevenueWorking Capital Inv. Cost SavingsRepairs & Maint. Allowed Tax CreditsInc. Man. & Op Costs Salvage ValueInterest and Loan Pmt Working Cap ReleaseIncome Taxes ST & LT Loans
7-5
0 1 2 3 N
Cash Flow Elements
Borrowed Funds
Investment in Assetsand Working Capital
Operating Cash Inflows
Operating Cash Outflows
Loan Repayment
Salvage Value
Recovery of Working Capital
Net cash flow = Cash inflow - cash outflow
7-6
The Cash Flow Cycle
OrderGoods
Day 1
ReceiveGoods
15
PayInvoice
40
14 25
218
178
SellGoods*
DeliverGoods
221
3
CustomerPays**
SendInvoice
230
9
280
50
Cash Flow Cycle = 240 days
* Based on Average Inventory Turnover:
365 days = 178 days2.05 times/year
** Based on Average Collection Period:
365 days = 50 days7.31 times/year
7-7
Cash Flow Definitions
Operating Cash FlowEBITDA = EBIT + Dep/Amort
or, EBIT(1 t) + Dep/Amort
Free Cash Flow = EBIT(1 t) + Dep/Amort - Change in NWC - Capital Spending
7-8
Free Cash Flow
Dividends are the cash flows actually paid tostockholders. Free cash flows are the cash flowsavailable for distribution.
Free Cash Flow (FCF) is the amount of cash flowavailable to debt and equity holders after meeting alloperating needs and paying for its net fixed assetinvestments (NFAI) and net current asset investments(NCAI).
FCF = OCF NFAI - NCAI
NFAI = Change in net fixed assets + Depreciation
NCAI = Change in CA Change in A/P and Accruals
7-9
Profitability and cash flow
When Cash In is consistently larger than Cash out= Profitable and sustainable business
If and when Cash goes out faster than Cash gets In, business could bankrupt even when profitable
7-10
Reasons for Cash Flow Problems
Difficulty in collecting receivablesSeasonality of salesUnexpected variation in sales Policies on how payments are made to
suppliers)Large expenditures up front for customer
projects Capital projects Ineffective inventory management
7-11
Cash Flow Management
Assure cash is available when neededManage timing of cash in and cash out
Manage working capital
Minimize expenditures
Know how business get and uses its cash
Know how growth affects cash needs
7-12
Purposes of the Cash Flow Statement
The cash flow statement is designed to fulfill the following:
Predict future cash flows
Determine the ability to pay dividends plus interest and principal
Show the relationship of net income to cash flow
How much cash was generated by operating activities?
What were the new financing activities during the period?
How much of new financing was internally generated or was from new debt or equity?
How was debt financed and paid?
7-13
Let us understand Cash Flow Statement with example
7-14
Sources and Uses StatementSources and Uses Statement
The letters labeling the boxes stand for Uses, Sources,Assets, and Liabilities (broadly defined). The pluses (minuses) indicate increases (decreases) in assets or liabilities.
The letters labeling the boxes stand for Uses, Sources,Assets, and Liabilities (broadly defined). The pluses (minuses) indicate increases (decreases) in assets or liabilities.
A L- ++ -
SU
7-15
Sources / Uses of Cash
SOURCESProfitable operationsSales of fixed assetsLong-term borrowing Issues of sharesDecrease in working
capital
USESLoss-making operationsPurchase of fixed
assets
Repayment of loansPayment of dividends Increase in working
capital
7-16
BWs Determination of Sources and UsesBWs Determination of Sources and Uses
$ 100 - S410 - S616 + U
5 --9 + U
$ 1,140 N/A930 N/A (299) N/A
$ 631 + U50 --
223 --$ 2,044
$ 100 - S410 - S616 + U
5 --9 + U
$ 1,140 N/A930 N/A (299) N/A
$ 631 + U50 --
223 --$ 2,044
Cash and C.E. $ 90 Acct. Rec. 394 Inventories 696 Prepaid Exp 5 Accum Tax Prepay 10
Current Assets $ 1,195 Fixed Assets (@Cost) 1030 Less: Acc. Depr. (329)
Net Fix. Assets $ 701 Investment, LT 50 Other Assets, LT 223
Total Assets $ 2,169
Assets 2007 2006 +/- S/U
7-17
BWs Determination of Sources and UsesBWs Determination of Sources and Uses
$ 100 $10 S410 16 S616 80 U
5 --9 1 U
$ 1,140 N/A930 N/A (299) N/A
$ 631 70 U50 --
223 --$ 2,044
$ 100 $10 S410 16 S616 80 U
5 --9 1 U
$ 1,140 N/A930 N/A (299) N/A
$ 631 70 U50 --
223 --$ 2,044
Cash and C.E. $ 90 Acct. Rec. 394 Inventories 696 Prepaid Exp 5 Accum Tax Prepay 10
Current Assets $ 1,195 Fixed Assets (@Cost) 1030 Less: Acc. Depr. (329)
Net Fix. Assets $ 701 Investment, LT 50 Other Assets, LT 223
Total Assets $ 2,169
Assets 2007 2006 +/- S/U
7-18
BWs Determination of Sources and UsesBWs Determination of Sources and Uses
$ 295 - U94 --16 --
100 --$ 505 N/A
453 + S
200 --729 --157 + S
$ 1086 N/A$ 2,044
$ 295 - U94 --16 --
100 --$ 505 N/A
453 + S
200 --729 --157 + S
$ 1086 N/A$ 2,044
Notes Payable $ 290 Acct. Payable 94 Accrued Taxes 16 Other Accrued Liab. 100
Current Liab. $ 500 Long-Term Debt 530 Shareholders EquityCom. Stock ($1 par) 200Add Pd in Capital 729 Retained Earnings 210
Total Equity $ 1,139Total Liab/Equity $ 2,169
Liabilities and Equity 2007 2006 +/- S/U
7-19
BWs Determination of Sources and UsesBWs Determination of Sources and Uses
$ 295 $ 5 U94 --16 --
100 --$ 505 N/A
453 77 S
200 --729 --157 53 S
$ 1086 N/A$ 2,044
$ 295 $ 5 U94 --16 --
100 --$ 505 N/A
453 77 S
200 --729 --157 53 S
$ 1086 N/A$ 2,044
Notes Payable $ 290 Acct. Payable 94 Accrued Taxes 16 Other Accrued Liab. 100
Current Liab. $ 500 Long-Term Debt 530 Shareholders EquityCom. Stock ($1 par) 200Add Pd in Capital 729 Retained Earnings 210
Total Equity $ 1,139Total Liab/Equity $ 2,169
Liabilities and Equity 2007 2006 +/- S/U
7-20
USES $156Increase, Inventories (S-15) $80Increase, Accum Tax Prepay (S-15) 1Decrease, Notes Payable (S-17) 5Increase, Net Fixed Assets (S-15) 70
$156
USES $156Increase, Inventories (S-15) $80Increase, Accum Tax Prepay (S-15) 1Decrease, Notes Payable (S-17) 5Increase, Net Fixed Assets (S-15) 70
$156
SOURCESIncrease, Retained Earnings (S-17) $ 53Decrease, Accounts Receivable (S-15) 16Increase, Long-Term Debt (S-17) 77Decrease, Cash + Cash Equivalents (S-15) 10
Basic Sources and Uses StatementBasic Sources and Uses Statement
7-21
Adjusting the Basic Sources and Uses StatementAdjusting the Basic Sources and Uses Statement
The following three slides are Basket Wonders Balance Sheet
and Income StatementThis information will be needed to adjust the basic Sources
and Uses Statement.
The following three slides are Basket Wonders Balance Sheet
and Income StatementThis information will be needed to adjust the basic Sources
and Uses Statement.
7-22
Basket Wonders Balance Sheet (Asset Side) refer (S-15)Basket Wonders Balance Sheet (Asset Side) refer (S-15)
a. How the firm stands on a specific date.
b. What BW owned.c. Amounts owed by
customers.d. Future expense items
already paid.e. Cash/likely convertible
to cash within 1 year.f. Original amount paid.g. Acc. deductions for
wear and tear.
a. How the firm stands on a specific date.
b. What BW owned.c. Amounts owed by
customers.d. Future expense items
already paid.e. Cash/likely convertible
to cash within 1 year.f. Original amount paid.g. Acc. deductions for
wear and tear.
Cash and C.E. $ 90 Acct. Rec.c 394 Inventories 696 Prepaid Exp d 5 Accum Tax Prepay 10
Current Assetse $1,195 Fixed Assets (@Cost)f 1030 Less: Acc. Depr. g (329)
Net Fix. Assets $ 701 Investment, LT 50 Other Assets, LT 223
Total Assetsb $2,169
Basket Wonders Balance Sheet (thousands) Dec. 31, 2007
7-23
Basket Wonders Balance Sheet (Liability Side) refer (S-16)Basket Wonders Balance Sheet (Liability Side) refer (S-16)
a. Note, Assets = Liabilities + Equity.
b. What BW owed and ownership position.
c. Owed to suppliers for goods and services.
d. Unpaid wages, salaries, etc.
e. Debts payable < 1 year.f. Debts payable > 1 year.g. Original investment. h. Earnings reinvested.
a. Note, Assets = Liabilities + Equity.
b. What BW owed and ownership position.
c. Owed to suppliers for goods and services.
d. Unpaid wages, salaries, etc.
e. Debts payable < 1 year.f. Debts payable > 1 year.g. Original investment. h. Earnings reinvested.
Notes Payable $ 290 Acct. Payablec 94 Accrued Taxes d 16 Other Accrued Liab. d 100
Current Liab. e $ 500 Long-Term Debt f 530Shareholders EquityCom. Stock ($1 par) g 200Add Pd in Capital g 729 Retained Earnings h 210
Total Equity $1,139Total Liab/Equitya,b $2,169
Basket Wonders Balance Sheet (thousands) Dec. 31, 2007
7-24
Basket Wonders Income StatementBasket Wonders Income Statement
a. Measures profitability over a time period.
b. Received, or receivable, from customers.
c. Sales comm., adv., officers salaries, etc.
d. Operating income.e. Cost of borrowed funds.f. Taxable income.g. Amount earned for
shareholders.
a. Measures profitability over a time period.
b. Received, or receivable, from customers.
c. Sales comm., adv., officers salaries, etc.
d. Operating income.e. Cost of borrowed funds.f. Taxable income.g. Amount earned for
shareholders.
Net Sales $ 2,211 Cost of Goods Sold b 1,599
Gross Profit $ 612 SG&A Expenses c 402
EBITd $ 210 Interest Expensee 59
EBT f $ 151Income Taxes 60
EATg $ 91 Cash Dividends 38 Increase in RE $ 53
Basket Wonders Statement of Earnings (in thousands) for Year Ending December 31, 2007
7-25
Adjusting the Basic Sources and Uses StatementAdjusting the Basic Sources and Uses Statement
Recognize Profits and DividendsChange in retained earnings is composed
of profits and dividends.
Source: Net Profit (S-22) $91Less Use: Cash Dividends (S-22) 38(Net) Source: Incr., R.E. $53
Recognize Profits and DividendsChange in retained earnings is composed
of profits and dividends.
Source: Net Profit (S-22) $91Less Use: Cash Dividends (S-22) 38(Net) Source: Incr., R.E. $53
7-26
Adjusting the Basic Sources and Uses StatementAdjusting the Basic Sources and Uses Statement
Recognize Depreciation and Gross Changes in Fixed Assets
Change in net fixed assets is composed of depreciation and fixed assets.
Source: Depreciation (S-14) $ 30Less Use: Add. to F.A. (S-14) 100(Net) Use: Incr., Net F.A. $ 70
Recognize Depreciation and Gross Changes in Fixed Assets
Change in net fixed assets is composed of depreciation and fixed assets.
Source: Depreciation (S-14) $ 30Less Use: Add. to F.A. (S-14) 100(Net) Use: Incr., Net F.A. $ 70
7-27
SOURCESFunds provided by operations
Net Profit (S-22) $ 91Depreciation (S-14) 30
Decrease, Accounts Receivable (S-18) 16Increase, Long-Term Debt (S-18) 77Decrease, Cash + Cash Equivalents (S-18) 10
$224
Sources and Uses Statement (Sources Side)Sources and Uses Statement (Sources Side)
7-28
USES
Dividends (S-22) $ 38Additions to fixed assets (S-14) 100
Increase, Inventories (S-18) 80Increase, Accum. Tax Prepay (S-18) 1Decrease, Notes Payable (S-18) 5
$224
Sources and Uses Statement (Uses Side)Sources and Uses Statement (Uses Side)
7-29
Statement of Cash FlowsStatement of Cash Flows
operating activities,investing activities, and
financing activities.
operating activities,investing activities, and
financing activities.
This statement reports cash inflowsand outflows based on the firms
A summary of a firms payments during a period of time.
7-30
Statement of Cash Flows
Cash Flow from Operating Activities
Shows impact of transactions not defined as investing or financing
activities. These cash flows are generally the cash
effects of transactions that enter into the determination of net income.
7-31
Cash Flow From Operating Activities
Cash InflowsFrom sales of goods or servicesFrom interest and dividend income
Cash OutflowsTo pay suppliers for inventoryTo pay employees for servicesTo pay lenders (interest)To pay government for taxesTo pay other suppliers for other
operating expenses
7-32
Cash Flow From Operating Activities
It would seem more logical to classify interest and dividend income as an
investing inflow, while interest paid certainly looks like a financing
outflow. But, the GAAP Standards classified these
items as operating flows.
7-33
Statement of Cash FlowsStatement of Cash Flows
Cash Flow from Financing ActivitiesShows impact of all cash transactions with shareholders and the borrowing
and repaying transactions with lenders.
Cash Flow from Financing ActivitiesShows impact of all cash transactions with shareholders and the borrowing
and repaying transactions with lenders.
Cash Flow from Investing ActivitiesShows impact of buying and selling
fixed assets and debt or equity securities of other entities.
7-34
Cash Flow From Investing Activities
Cash InflowsFrom sale of fixed assets (property, plant,
equipment)From sale of debt or equity securities (other
than common equity) of other entities
Cash OutflowsTo acquire fixed assets (property, plant,
equipment)To purchase debt or equity securities (other
than common equity) of other entities
7-35
Cash Flow From Financing Activities
Cash InflowsFrom borrowingFrom the sale of the firms own equity
securities
Cash OutflowsTo repay amounts borrowedTo repurchase the firms own equity
securitiesTo pay shareholders dividends
7-36
7-37
Determination of Cash Flows From Operating Activities
Direct MethodIncome Statement items are converted to
cash flows individually
Indirect MethodNet income or loss is adjusted for
accruals such as accounts receivable and payable, and for non-cash expenses such as depreciation reconciliation of the accrual based and cash based accounting
7-38
Comparison of Methods
Direct method of presentation calculates cash flow from operations by subtracting cash disbursements to supplies, employees, and others from cash receipts from customers.
The indirect method calculates cash flow from operations by adjusting net income for non-cash revenues and expenses.
Most firms present their cash flows using the indirect method.
Only operating activities section is different between the methods, investing and financing
sections are the same.
7-39
Indirect Method --Statement of Cash Flows
Cash Flow from Operating Activities
Net Income (S-22) $ 91Depreciation (S-14) 30Decrease, accounts receivable (S-18) 16Increase, inventories (S-18) ( 80)Increase, accum. tax prepay (S-18) ( 1)
Net cash provided (used) byoperating activities $ 56
7-40
Indirect Method --Statement of Cash Flows
Cash Flow from Investing Activities
Additions to Fixed Assets (S-14) $(100)
Net cash provided (used) byinvesting activities $(100)
7-41
Indirect Method --Statement of Cash Flows
Cash Flow from Financing Activities
Increase, notes payable (S-18) $ ( 5)Increase, long-term debt (S-18) 77Dividends paid (S-22) ( 38)
Net cash provided (used) by financing activities $ 34
7-42
Indirect Method --Statement of Cash Flows
Increase (decrease) in cash and cash equivalents (S-15) $ ( 10)
Cash and cash equivalents, 2006 100Cash and cash equivalents, 2007 $ 90
Supplemental cash flow disclosuresInterest paid (S-22) $ 59Taxes paid (S-22) 60
7-43
Direct Method --Statement of Cash Flows
Cash Flow from Operating Activities
Cash received from customersa $2,227Cash paid to suppliers and
employeesb (2,051)Interest paid ( 59)Taxes paidc ( 61)
Net cash provided (used) byoperating activities $ 56
a, b, c See Worksheet on next slide for calculation
7-44
Worksheet for Preparing Operating Activities Section
Sales (S-22) $2,211+(-) Decrease (increase) in AR (S-18) 16
Cash received from customers $2,227
COGS - Depreciation + SGA (1599-30+402)((S-22) , (S-14) , (S-22) ) $1,971
+(-) Increase (decrease) in inventory (S-18) 80Cash paid to suppliers and employees $2,051
Income taxes (federal / state) (S-22) $ 60+(-) Incr (Decr) in accum. tax prepay (S-18) 1
Taxes paid $ 61
(a)
(b)
(c)
7-45
Direct Method --Statement of Cash Flows
Cash Flow from Investing Activities
Additions to Fixed Assets (S-14) $(100)
Net cash provided (used) byinvesting activities $(100)
7-46
Direct Method --Statement of Cash Flows
Cash Flow from Financing Activities
Decrease, notes payable (S-18) $ ( 5)Increase, long-term debt (S-18) 77Dividends paid (S-22) ( 38)
Net cash provided (used) by financing activities $ 34
7-47
Direct Method --Statement of Cash Flows
Increase (decrease) in cash and cash equivalents $ ( 10)
Cash and cash equivalents, 2006 100Cash and cash equivalents, 2007 $ 90
Supplemental cash flow disclosuresNet Income (EAT) $ 91Depreciation 30Decrease, accounts receivable 16Increase, inventories ( 80)Increase, accum. tax prepay ( 1)Net cash provided (used) byoperating activities $ 56
7-48
WORDS OF WISDOM
Cash flow analysis is a method of worrying before you spend your
money instead of afterwards.
7-49
Thank Q