A Finance Survival Kit

1
A Finance Survival Kit

• GEM2508

Frederick H. Willeboordse frederik_at_chaos.nus.edu.s
g
2

• Lecture 3

The Cash Flow Statement
3
Todays Lecture

• Basic Excel
• Understand the elements of the Cash Flow
  Statement
• Make a simple Cash Flow Statement with MS Excel

?
Where does it go?
4
Excel Basics Graphs
Graphs are easy to make. E.g. type some numbers
and select them. Then go to the graph tool button
and click on it.A handy wizard will pop up that
gives you many options but for starters you can
just click next.
5
Excel Basics Graphs
And this is the result that we get. The graph
can be moved around and of course there are many
options for labeling and representing the data.
When selecting a graph by clicking on it, the
data are highlighted by a colored box (blue in
this case).
6
Excel Basics Solver
The Solver can be found in the Tools menu of
Excel. If its not there, it can be installed by
going to the Add-ins menu item and selecting
the Solver Add-in.
The power of the solver is that is can do
mathematics without formulas. This is extremely
useful when formulas are difficult or impossible
to find.
7
Excel Basics Solver
For example, we have the situation to the left
and we would like to find a value for cell B2
such that our calculation in cell B5 gives 2.5 as
a result. Of course, we could easily do this by
deriving a simple formula. But this time, let us
use the solver.
Go to the Tools menu and click on Solver.
8
Excel Basics Solver
Select the Target Cell, the value and choose
which cell should be changed.
Click Solve.
9
Excel Basics Solver
The Solver will try to find a solution and
automatically enter it in the spread sheet. A
box asks you to confirm the solution.
Click OK and were done.
10
Excel Basics If-Then
The If-then statement allows you to do logical
tests. In this case we compare two numbers and
indicate whether the first number is bigger or
smaller.
The syntax of the if-then statement is given by
Note the quotation marks. These indicate that the
text between them is a so-called string, i.e.
actual text and not the name of a variable or so.
11
Cash Flow
Help!
?
Where does it go?
?
Holiday ..
In daily life, we all know the experience ..
Where did the money go? Its good to know! In
business its essential to know!
12
Cash Flow Statement
The Cash Flow Statement is the third of the three
basic financial statements. It is closely related
to matters concerning the daily operation of a
company. The Cash Flow Statement shows where the
money goes (out-flows) and where it comes from
(in-flows) during a certain period of time. It
also shows the net in- or out-flow during that
period of time. This is an extremely important
number in the financial management of a company!
13
Cash Flow Statement
One way to look at the difference between the
three basic financial statements. While the
Balance Sheet shows cash balances and the Income
Statement where the money comes from or goes to,
the Cash Flow Statement shows why cash increased
or deceased.
14
Cash Flow Statement
In other words
Beginning Cash Balance
- Cash Out-Flows (Uses)
Cash In-Flows (Sources)
Ending Cash Balance
15
Cash Flow Statement

• The Cash Flow Statement is usually divided into
  three sections
• Cash Flows from Operations These are the cash
  flows generated by the daily running of
  the business. E.g. the buying and selling of
  goods.
• Cash Flows from Investments Usually, with
  investments one means here fixed assets like
  plant and equipment.
• Cash Flows from Financing Loans play an
  important part in most businesses. Here, mainly,
  the cash flows related to the repayment of loans
  or the taking up of new loans are listed. This
  item could also e.g. contain the cash flows from
  issuing stock.

16
A Simple Cash Flow Statement
Incomprehensible!!! But difficult??
Lets first clean this up a bit and then look
at it in more detail
17
A Simple Cash Flow Statement
Use the Center and Merge Button Change the Font
Underline before the subtotals
Make the main items italic
Make the total bold
18
A Simple Cash Flow Statement

• Many accountants compute the amounts for the Cash
  Flow Statement by using the Income Statement and
  the changes in the related Balance Sheet
  accounts.
• This is often called the T-account approach. Of
  course this only works if the relevant
  information is actually listed in the Income
  Statement and Balance sheet.

Let us have a look at the items in the cash flow
statement one by one.
19
Elements of a Cash Flow Statement

• Cash Flows from Operations
• Receipts Here the most important receipts from
  daily operations for the business are listed. It
  is important to realize that the choice of
  what to list and what not is dependent on the
  nature of the company.
• Disbursements Here the most important
  disbursements necessary for the daily operations
  are listed. Again, the choice of what to list and
  what not depends on the nature of the company.

20
Elements of a Cash Flow Statement

• Cash Flows from Investing Activities
• Purchase of Equipment Most businesses cannot
  operate without some kind of investment. In
  order to get (and keep) a company running, it
  needs to buy certain equipment like e.g.
  computers and tools. Usually, such items can be
  used for many years which is why they are not
  listed under Cash Flow from Operations but
  separately.
• Sale of Equipment Of course one can also sell
  equipment previously bought. E.g. when one wants
  to upgrade or when one no longer wants it. Think
  of Singapore Airlines always wanting to have a
  nice new fleet. What to do with those old
  planes? One option is to sell them.

21
Elements of a Cash Flow Statement

• Cash Flows from Financing Activities
• Long Term Loan Knowing when and where to
  borrow money is an important aspect of
  management. If you borrow at the wrong moment at
  the wrong place you might end up in trouble.
  (Think Asian Crisis). On the other hand, if you
  have a great idea and give up on it due to lack
  of funds you might loose a fantastic
  opportunity. Since cash inflows (or outflows)
  due to loans are not part of daily operations,
  they are listed separately here.
• Payment of Dividends Of course the idea of
  investing in a company as a shareholder is to
  get more money back than one puts in. Some
  companies return a part of their profits to the
  shareholders as dividends as a kind of interest
  on their shares (note this is usually a rather
  small amount).

22
Elements of a Cash Flow Statement
Net Change in Cash Balance The net change in
cash balance is an important indicator for how
well the company will be able to continue doing
business. If the net change is strongly
negative and the company has little or no cash
left, it will almost certainly need new loans. It
is good to know that one needs to plan for that.
On the other hand if the cash flow is positive
and there are little debts, extra cash for new
investments or for dividends will be available.
23
Elements of a Cash Flow Statement
Now let us look at how we can actually obtain
some of the items from the Balance Sheet and the
Income Statement. Cash Flow from Operating
Activities Receipts Disbursements
Payments from Customers Sales - Change in Accounts Receivable
To Suppliers Cost of Goods sold Change in Inventory Change in Accounts Payable (for Inventory)
24
Example of a Cash Flow Statement

25
Example of a Cash Flow Statement

26
Key Points of the Day

• The Cash Flow Statement provides important
  information regarding the cash requirements of a
  company.
• (Parts of) the Cash Flow Statement can be derived
  from the Balance Sheet and the Income Statement
  by analyzing changes.