Cash Flow and Financial Planning

Outline Introduction Analysing Cash Flows The Financial Planning Process Cash Budgets Pro forma statements

Introduction Depreciation Accounting vs Tax Depreciable value = all cost necessary to get asset into condition needed to use the asset less salvage/residual value Depreciable life Depreciation methods Straight line Reducing balance Sum of years

Statement of Cash Flows Purpose: analyse cash flows Analyse strength of business Analyse funding decisions Analyse investing decisions

Operations Financing Investing

Cash Flows in pictures

Use T-Accounts when not sure Cash from Operations Net profit Adjusted for non-cash movements: Depreciation Bad Debts Impairment Working capital movements Changes in accounts receivable Changes in Inventory Changes in accounts payable Changes in accrued expenses Changes in other current assets and liabilities Use T-Accounts when not sure

Operating Cash Flows (OCF) OCF = NOPAT + Depreciation Nopat = EBIT x (1-T) Therefore OCF = EBIT x (1-T) + Depreciation EBIT = Operating Profit (Earnings before Interest and Tax)

X Free Cash Flow (FCF) FCF = OCF – CAPEX – Changes in Working Capital FCF = OCF – Net non-current investment – Net current asset investment NNCI = Change in net non-current + depreciation X

Financial Planning Process Guide Strategic Cash Planning Operational Profit Planning Long Term Short Term Co-ordinate Control

Long-Term Financial Plans Bigger picture 2 – 10 years

Short Term (operating) Sales Forecast Production plans Pro-forma Income Statement Pro-forma balance sheet Long-term Financing plan Non-Current Asset layout plan Cash Budget Current Balance Sheet

Sales Forecast External Internal Cash Receipts (Lagged) Sales receipts Other receipts Cash Disbursements (Lagged) rent Wages and salaries Tax Interest Dividends Principal loan repayments

Desired Minimum cash balance Cash Receipts - Cash Disbursements = Net Cash Flow + Beginning Cash - Desired Minimum cash balance = Required Total financing / Excess cash balance