1、Author: Collins Qian,Contributor: Chris Nelson,bc,Cash Flow,Copyright 1998 Bain & Company, Inc.,2,CU7010598KRA,Cash Flow,Agenda,The importance of cash flow Types of cash flow Applications Cash flow steps Exercise Key takeaways,3,CU7010598KRA,Cash Flow,Agenda,The importance of cash flow Types of cash
2、 flow Applications Cash flow steps Exercise Key takeaways,4,CU7010598KRA,Cash Flow,What is Cash Flow?,Cash flow describes the movement of cash into (sources) and out of (uses) a company.,Sources of cash,Company,Uses of cash,$,$,$,$,$,$,$,$,5,CU7010598KRA,Cash Flow,Why Do We Care About Cash?,The mark
3、et value of a company is equal to the present value of its expected future cash flows Various stakeholders demand cash investors demand CASH returns suppliers and employees require CASH compensation debtholders demand CASH payments Accounting methods can be used to “manage” earnings; CASH is harder
4、to manipulate,Cash is King!,Cash flow is the measure of a companys strategic value.,6,CU7010598KRA,Cash Flow,Earnings vs. Cash Flow*,Some accounting decisions impact earnings, but not cash In 1988, General Motors made at least four decisions that impacted earnings but not cash,Earnings do not equal
5、cash flow.,*Earnings are also called after tax profits or net income,Successful high growth companies tend to have high earnings, but low cash flow; successful low growth companies tend to have low earnings, but high cash flow,Earnings Impact,$790MM,$480MM,$217MM,$270MM,Cash Impact,None,None,None,No
6、ne,Total:,$1,757MM,None,7,CU7010598KRA,Cash Flow,Agenda,The importance of cash flow Types of cash flow Applications Cash flow steps Exercise Key takeaways,8,CU7010598KRA,Cash Flow,Types of Cash Flow,Net cash flow is equal to the sum of the cash flows from operating, investing, and financing activiti
7、es.,Operating cash flow,Investing cash flow,Financing cash flow,Ability of a companys recurring operations to generate cash,Ability of a companys investment decisions to generate cash,How a company funds its operations,Operating profits Decrease in working capital,Sale of fixed assets,Long-term issu
8、ance of shares,Examples of sources:,Operating losses Increase in working capital,Purchase of fixed assets,Repayment of loans Payment of dividends,Examples of uses:,9,CU7010598KRA,Cash Flow,Operating Cash Flow,*Investing activities not related to ongoing operations (such as the purchase or sale of di
9、visions or companies, or investments in unrelated businesses) are not included in investing cash flow. They are included in financing cash flow.,Operating cash flow excludes all cash flows related to a firms capital structure cash generation ability is independent of how a firm is financed It exclud
10、es one-time events these are not related to a firms recurring operations Operating cash flow is used to measure the strategic value of a business for company valuations, operating and investing cash flows are used, not financing cash flow,Bain is usually more interested in operating and investing* c
11、ash flow than in financing cash flow,Operating cash flow measures the ability of a businesss recurring operations to generate cash.,10,CU7010598KRA,Cash Flow,Investing Cash Flow,Investments in ongoing operations - property, plant and equipment - are included in investing cash flow cash is used to re
12、place assets as they wear out if a business is to grow, additional assets must be acquired in some cases, the cash used to acquire these assets is generated from the sale of existing noncurrent assets such cash inflows, however, seldom cover the entire cost of asset acquisitions. Often times cash fl
13、ow from operations is used to finance acquisitions, or, failing a positive operating cash flow, external financing is used Pure financing activities are not included in investing cash flow. They are included in financing cash flow purchase or sale of divisions or companies investments in unrelated b
14、usinesses Investing cash flows relating to ongoing operations are used as a measure of the strategic value of a business. Those that are purely financing/investment mechanisms are used to evaluate the financial strategy of the business,Investing cash flow measures the use of a businesss cash for the
15、 acquisition of non-current assets.,11,CU7010598KRA,Cash Flow,Financing Cash Flow,Major types of financing cash flow include: debt-related transactions changes in long-term debt interest income and expense equity-related transactions changes in common and preferred stock dividends short-term investm
16、ents long-term asset and liability transactions purchase or sale of a division or company changes in long-term liabilities,Financing cash flow captures all the non-operating cash changes experienced during the year, and it provides information on how a company is funding its operations.,12,CU7010598
17、KRA,Cash Flow,Statement of Cash Flows,The SCF is divided into three sections: operating, investing, and financing Each section shows sources and uses of funds for the accounting period The SCF shows the amounts for depreciation and amortization capital expenditures taxes paid dividends paid It does
18、not show sources and uses by business unit It does not provide much detail for example, it does not show capital expenditures by project, nor individual equipment purchases,The SCF is not a substitute for cash flow analysis,The statement of cash flows (SCF) found in annual reports is a good source o
19、f data for constructing cash flows, but sometimes it does not have the detail required for the analysis being done.,13,CU7010598KRA,Cash Flow,Agenda,The importance of cash flow Types of cash flow Applications Cash flow steps Exercise Key takeaways,14,CU7010598KRA,Cash Flow,Applications,Bain case tea
20、ms use cash flow (CF) analysis to value investments/acquisitions, to improve the health of business units, and to help companies manage their portfolios.,Valuation (mergers, acquisitions),Business unit analysis,Portfolio management,What is the cash generation potential of an investment/ acquisition?
21、 What are we willing to pay (in cash) for that investment/acquisition?,How healthy is a business unit? What factors have effected the business units ability to generate cash/value over time? How can the business units cash management be improved?,What is the overall balance of cash users/cash genera
22、tors in a clients portfolio of businesses? How does this effect the clients overall cash position/outlook? What restructuring can be done to improve this profile?,CF = common denominator,CF = measuring stick,CF = portfolio tool,15,CU7010598KRA,Cash Flow,Agenda,The importance of cash flow Types of ca
23、sh flow Applications Cash flow steps Exercise Key takeaways,16,CU7010598KRA,Cash Flow,Cash Flow Cookbook,*Cash is defined as cash plus marketable securities minus short-term notes *I/S = income statement, SCF = statement of cash flows, B/S = balance sheet,+ +/ - +/ - - +/ - =,1. Profit before intere
24、st and tax (PBIT) 2. Depreciation 3. Other non-cash expenses/income 4. Decrease/increase in working capital (excluding cash) 5. Taxes paid 6. Tax impact of interest income/expenseOperating cash flow,Bain case teams use the following cash flow cookbook:,- =,7. Capital expendituresInvesting cash flow,
25、+/ - +/ - +/ - +/ - - +/ - =,8. Interest income/expense 9. Tax impact of interest expense/income 10. Increase/decrease in long-term debt 11. Increase in outstanding stocks/shares 12. Dividends 13. Changes in other accountsFinancing cash flow,14. Reconcile with change in cash* from Balance Sheet,Net
26、cash flow,Source*,I/S,SCF, B/S and Notes,Notes,B/S,I/S, B/S,I/S,SCF, B/S and Notes,I/S,I/S,B/S,B/S,SCF, B/S, and Notes,B/S, I/S,B/S,17,CU7010598KRA,Cash Flow,Agenda,The importance of cash flow Types of cash flow Applications Cash flow steps Exercise Key takeaways,18,CU7010598KRA,Cash Flow,Exercise -
27、 Background (p. 1),*This exercise is based on The Gillette Companys financial statements in 1996. Since several modifications have been made to the financial statements, the information provided hereafter should not be used to analyze Gillettes financial performance.,Net Sales,Cost of Sales,Gross Pr
28、ofit,SG&A,Profit from Operations,Interest Expense,Income before taxes,Income Taxes,Net Income,1996,$9,697.7MM,($3,681.7MM),$6,016.0MM,($4,379.7MM),$1,636.3MM,($111.3MM),$1,525.0MM,($576.3MM),$948.7MM,Income Statement: The New England Razor Company*,Use the following data to calculate the cash flow f
29、or The New England Razor Company:,19,CU7010598KRA,Cash Flow,*Deferred taxes can be a liability account, an asset account, or both (as is the case here).,Assets,Current Assets,Cash,Marketable securities,Receivables,Inventories,Deferred income taxes*,Prepaid expenses,Total Current Assets,Property, Pla
30、nt & Equipment,Liabilities and Stockholders Equity,Current Liabilities,Loans payable,Current portion of Long-Term debt,Accounts payable and accrued expenses,Income taxes payable,Total Current Liabilities,Long-Term Debt,Deferred Income Taxes*,Other Long-Term Liabilities,Dividends Payable,Stockholders
31、 Equity,Common stock,Additional Paid-in Capital,Retained Earnings,Treasury stock,Total Stockholders Equity,$76.9,$7.0,$2,724.6,$1,358.2,$359.3,$227.2,$4,753.2,$5,192.0,$9,945.2,$656.7,$14.5,$1,964.9,$298.6,$2,934.7,$1,490.4,$298.9,$630.2,$100.1,$671.4,$707.0,$4,168.7,($1,056.2),$4,490.9,1995,$81.6,$
32、1.6,$2,290.8,$1,267.6,$246.8,$199.3,$4,087.7,$4,456.6,$8,544.3,$634.7,$26.5,$1,609.8,$319.4,$2,590.4,$1,048.4,$303.4,$635.1,$66.7,$667.1,$574.8,$3,704.2,($1,045.8),$3,900.3,$9,945.2,$8,544.3,Balance Sheet December 31, 1996 and 1995 (in $MM),1996,Exercise - Background (p. 2),20,CU7010598KRA,Cash Flow
33、,Property, Plant and Equipment Less accumulated depreciation Net Property, Plant, and Equipment,1996 (in $MM),$7,820.4 $2,628.4 $5,192.0,1995 (in $MM),$6,885.0 $2,428.4 $4,456.6,Note 1: Property, Plant and Equipment,Note 2: Dividends The company declared dividends of $484.2MM in 1996,Note 3: Sale of
34、 assets A loss of $22MM was incurred on equipment sold during the year The equipment had an original cost of $244.0MM and was sold for $40.9MM,Exercise - Background (p. 3),Notes to the financial statements are a critical source of information.,21,CU7010598KRA,Cash Flow,Operating Cash Flow,*Cash is d
35、efined as cash plus marketable securities minus short-term notes *I/S = income statement, SCF = statement of cash flows, B/S = balance sheet,+ +/ - +/ - - +/ - =,1. Profit before interest and tax (PBIT) 2. Depreciation 3. Other non-cash expenses/income 4. Decrease/increase in working capital (exclud
36、ing cash) 5. Taxes paid 6. Tax impact of interest income/expenseOperating cash flow,- =,7. Capital expendituresInvesting cash flow,+/ - +/ - +/ - +/ - - +/ - =,8. Interest income/expense 9. Tax impact of interest expense/income 10. Increase/decrease in long-term debt 11. Increase in outstanding stoc
37、ks/shares 12. Dividends 13. Changes in other accountsFinancing cash flow,14. Reconcile with change in cash* from Balance Sheet,Net cash flow,Source*,I/S,SCF, B/S and Notes,Notes,B/S,I/S, B/S,I/S,I/S,I/S,B/S,B/S,B/S, I/S,B/S,SCF, B/S and Notes,SCF, B/S and Notes,22,CU7010598KRA,Cash Flow,Step 1 - Pro
38、fit Before Interest and Tax,Where to find:,Process:,Comments:,Income statement It can be labeled in many different ways, including profit before interest and tax, profit from operations, operating profit, and earnings before interest and tax,If income statement is provided, pick number from income s
39、tatement If income statement is not provided, calculate profit before interest and tax:Profit before taxes- Interest income and other income (earned) + Interest expense and other expenses (incurred)- Any one-time gains included in profit before taxes + Any one-time losses included in profit before t
40、axes= Profit before interest and tax (PBIT),The goal is to get profit before interest payments, tax payments, and extraordinary items,23,CU7010598KRA,Cash Flow,Step 1 - Profit Before Interest and Tax - Answer,Profit before interest and tax*:,$1,636.3MM,1996,Operating cash flow begins with profit bef
41、ore interest and tax.,*Shown as profit from operations on The New England Razor Companys income statement,24,CU7010598KRA,Cash Flow,Steps 2 and 3 - Depreciation and Other Non-Cash Income/Expenses,Where to find:,Process:,Depreciation - statement of cash flows, or calculate from Balance Sheet and Note
42、s Other Non-Cash Income/Expenses - Notes,Review assets and liabilities that are not taken into account in working capital (elements of working capital include current assets and liabilities with the exception of cash, tax items, and financing assets and liabilities (e.g., interest and dividends paya
43、ble) Ask two questions: was the item non-cash? was the item included in profit before interest and tax? If the answer to both is yes, adjust profit before interest and tax e.g., depreciation - add back to profit before interest and tax e.g., loss on sale of asset - add back to profit before interest
44、 and tax If answer to either question is no, make no adjustments,25,CU7010598KRA,Cash Flow,Step 2 - Depreciation,Where to find:,Process:,Statement of cash flows, or calculate from Balance Sheet and Notes,If depreciation is provided in the statement of cash flows, pick number from there If not, calcu
45、late depreciation:Accumulated depreciation at year end- Accumulated depreciation at year beginning + Depreciation from sale of asset,= Depreciation expense for the year,Depreciation from sale of asset: Original cost of asset - Proceeds from sale of asset - Losses incurred,= Depreciation from sale of
46、 asset,26,CU7010598KRA,Step 2 - Depreciation - Answer (p. 1),Depreciation from sale of asset = The original cost of asset - proceeds from sale of asset - losses incurred = $244.0MM - $40.9MM - $22.0MM = $181.1MM,Depreciation expense for 1996 = Accumulated depreciation at year end - accumulated depre
47、ciation at year beginning + depreciation from sale of asset = $2,628.4MM - $2,428.4MM + $181.1MM = $381.1MM,Cash Flow,Depreciation is a non-cash expense. Therefore, it is added to profit before interest and tax in the operating cash flow.,27,CU7010598KRA,Cash Flow,Step 2 - Depreciation - Answer (p.
48、2),The depreciation expense for the year can be calculated from the balance sheet and notes.,-,+,=,28,CU7010598KRA,Cash Flow,Step 3 - Other Non-Cash Expenses - Answer,Loss on equipment sold during the year:,$22.0MM (from Note 3),1996,Other non-cash expenses are added to profit before interest and ta
49、x in the operating cash flow.,29,CU7010598KRA,Cash Flow,Step 4 - Change in Working Capital (Excluding Cash),Where to find:,Process:,Balance sheet,Working capital = current assets - current liabilities Review each current asset and current liability,Include:,Exclude:,Cash and cash equivalents Tax items include in taxes paid calculation (Step 5) Financing assets and liabilities, such as: interest payable dividends payable current portion of long-term debt,Operating assets and liabilities,
