CASH FLOW ANALYSIS Chapter 4

1
CASH FLOW ANALYSISChapter 4
2
Two Popular Measures

• Net Income plus Depreciation (NIPD)
• Earnings Before Interest Taxes (EBIT)

3
HOWEVER .

• Balance Sheet changes markedly affect cash
  flow!!!
• Be very careful of the various definitions
  i.e. Free Cash Flow

4
Better Measures .

• Net Operating Cash Flow (NOCF)
• Net Operating Cash Flow Prime (NOCF)
• Net Operating Cash Flow Double Prime (NOCF)

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CASH FLOW MODELS
1. Change in Cash 3 - ( 4 5 ) 6 2. NOCF
3 - 4
THE AMOUNT OF MONEY YOU HAVE TO PLOW BACK OR PAY
OUT
3. NOCF 3 - Nec. 5
THE AMOUNT OF MONEY YOU HAVE TO SERVICE YOUR
DEBT.
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MONTH
Sales
10
-
(10) 0
A/R
Cash
A/R
.
0
10
10
7
MONTHS
Sales
10
15 (5) 10 15 5
-
A/R
(10) 0
Cash
A/R Bal.
0
10
10
8
MONTHS
Sales
10
15 (5) 10 15 5
25 (10) 15 25 10
-
A/R
(10) 0
Cash
A/R Bal.
0
10
10
9
MONTHS
Sales
10
15 (5) 10 15 5
25 (10) 15 25 10
10 15 25 10 -15
-
A/R
(10) 0
Cash
A/R Bal.
0
10
10
10
The Hot Buttons - Sensitivities

• Varies by Type of Company
• COGS
• A/R Management
• Inventory Management
• Accounts Payable Management
• Recession Scenario??

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What to Manage First??

• Income Statement
• Dollars are Gone forever!
• Balance Sheet can come later
• Dollar in Inventory, A/R, A/P Cash!
• The Fixed Cost Myth!

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Forecasting Cash Flows Ratio Approach

• Operating Cash Inflows
• Sales Given
• Other Income Estimate
• - Increase in A/R DSO
• Operating Cash Outflows
• Cost of Goods Sold
• - Depreciation Expense Sales
• GA Expense Sales
• Selling Expense Sales
• Taxes Pro-Forma Income Stmt.
• - Increase in Accrued Taxes Tax Rules
• Increase in Inventory Turnover to CGS
• - Increase in A/P Turnover to CGS
• Increase in Prepaids Estimate

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ILLUSTRATION OF IRREVERSIBILITY

• General
• Adm.Exp.

Company goes up one slope, goes back on a less
sloped function and then goes up again on a
higher function.
Sales
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ILLUSTRATION OF A SHIFT IN FUNCTION
x x x xx x x x x x x x xx x x xx x
x x

• Inventory

x x x x x x x x x x x x x x
Cost of Goods Sold
Yellow line is a false linear regression
line. Blue lines are true regression lines they
shifted