1. Introduction to Financial Management FIN 102 – 9 th Week of Class Professor Andrew L. H. Parkes “A practical and hands on course on the valuation and financial management of corporations” 卜安吉

2. Funds and Cash Flow Financial Management Fall 2007 Shanghai Chapter 7a: Funds Analysis and Planning

3. Intro. to Financial Managment - 10th Week of Class3 Sources and Use of Funds Funds are Cash and Cash equivalents Funds are Cash and Cash equivalents We already know that understanding the cash inflow – and - outflow of a business is extremely important. We already know that understanding the cash inflow – and - outflow of a business is extremely important. Remember: Remember: V= FCF/WACC ?

4. Intro. to Financial Managment - 10th Week of Class4 Changes in the Balance Sheet We first noticed this flow of funds when calculating FCF on Week 1! We first noticed this flow of funds when calculating FCF on Week 1! Four Key Points: Increasing assets consume cash (cash out) Increasing assets consume cash (cash out) Decreasing assets create cash (cash in) Decreasing assets create cash (cash in) Increasing liabilities or shareholder’s capital (equity) creates cash Increasing liabilities or shareholder’s capital (equity) creates cash Decreasing liabilities or shareholder’s capital (equity) consumes cash Decreasing liabilities or shareholder’s capital (equity) consumes cash

5. Intro. to Financial Managment - 10th Week of Class5 Example…Net Working Capital (Johnson & Johnson) In FY 2003, the inventories of J&J increased (the difference between the inventories per the end of FY2003 and FY2002) by $285m. A cash out for the company during FY2003. In FY 2003, the inventories of J&J increased (the difference between the inventories per the end of FY2003 and FY2002) by $285m. A cash out for the company during FY2003. Also the accounts receivable of J&J increased in FY2003 by $1,175m. Another large cash out for the company in FY 2003. Also the accounts receivable of J&J increased in FY2003 by $1,175m. Another large cash out for the company in FY 2003. The accounts payable (bills to be paid to the suppliers) increased by $1,375m. A large cash in for the company in FY2003. The accounts payable (bills to be paid to the suppliers) increased by $1,375m. A large cash in for the company in FY2003.

6. Intro. to Financial Managment - 10th Week of Class6 Example … Liabilities and Equity (Johnson & Johnson) Long term debt increased in FY 2003 by $ 933m. A cash in for J&J. Long term debt increased in FY 2003 by $ 933m. A cash in for J&J. Shareholders equity increased by $4,192m. Another cash in. Shareholders equity increased by $4,192m. Another cash in. If we include all the other cash effects from the balance sheet, the net cash increase in FY2003 was $2,048m. If we include all the other cash effects from the balance sheet, the net cash increase in FY2003 was $2,048m.

7. Intro. to Financial Managment - 10th Week of Class7 Example … OVERALL (Johnson & Johnson) The cash position on the balance sheet at the end of FY2002 was $ 7,475 m. The cash position on the balance sheet at the end of FY2002 was $ 7,475 m. The cash position at the end of FY2003 was $ 9,523m. The cash position at the end of FY2003 was $ 9,523m. Thus the cash increase was $ 2,048m. Thus the cash increase was $ 2,048m. The increased cash is the result of: Cash from Operations, Cash changes from Investments and Cash changes from Financing activities… The increased cash is the result of: Cash from Operations, Cash changes from Investments and Cash changes from Financing activities…

8. Intro. to Financial Managment - 10th Week of Class8 Remember – Overall, if … Assets Liabilities and Equity Source of Funds (cash in) If assets go down it’s a source of funds If liabilities and equity go up that is a source of funds Use of Funds (cash out) If assets go up it’s a use of funds If liabilities and equity go down that is a use of funds

9. Intro. to Financial Managment - 10th Week of Class9 So now you can do it… FOR YOUR company (or any company) you can calculate per item of the balance sheet the cash in and cash out. FOR YOUR company (or any company) you can calculate per item of the balance sheet the cash in and cash out. The result is the change in cash (the net cash generated during the year). The result is the change in cash (the net cash generated during the year). Let’s use the example… Let’s use the example…

10. Intro. to Financial Managment - 10th Week of Class10 Current assets excl. cash increased with $ 1,246 Mln. Cash increased $ 2,483 Mln. Total assets excl. cash increased $ 5,224 Mln. So cash out as a result of increased assets $ 5,224 m.

11. Intro. to Financial Managment - 10th Week of Class11 Current liabilities increased with $ 1,999 Mln. Long term liabilities increased with $ 1,536 Mln. Shareholders Equity increased with $ 4,172 Mln. A total cash in of $ 7,707 m. due to Increased liabilities.

12. Intro. to Financial Managment - 10th Week of Class12 Total Cash In $ 7,707 m. Total Cash In $ 7,707 m. Total Cash Out $ 5,224 m. Total Cash Out $ 5,224 m. Net Cash In: $ 2,483 m. Net Cash In: $ 2,483 m. Cash position at the end of FY 2002: $ 2,894 m. Cash position at the end of FY 2002: $ 2,894 m. Net Cash In in FY 2003: + $ 2,483 m. Net Cash In in FY 2003: + $ 2,483 m. Cash position at the end of FY 2003: $ 5,377 m. Cash position at the end of FY 2003: $ 5,377 m. Note the balance sheet FY 2003. Note the balance sheet FY 2003. Concluding

13. Intro. to Financial Managment - 10th Week of Class13 The Income Statement (P&L) Net Income to Cash Flow Statement

14. Intro. to Financial Managment - 10th Week of Class14 Operational Cash Flow Statement Net Income See Income Statement Change in NOWC Depreciation

15. Intro. to Financial Managment - 10th Week of Class15 Cash Flow from Investing Activities Capital Expenditures (CAPEX) Net Capital Expenditures (CAPEX) Net CAPEX

16. Intro. to Financial Managment - 10th Week of Class16 Cash Flow from Financing Activities Here is where the capital comes FROM that is, from DEBT or EQUITY (Stock). Net Cash Flow – See above!

17. Intro. to Financial Managment - 10th Week of Class17 End of the Section – Chapter 7a Go Get ‘em Tiger!