1. Analyzing Cash Flow and Other Financial Information
Chapter Six
Analyzing Cash Flow and Other Financial Information

2. 6-2
Learning Outcomes
6.1 Recognize the fundamental importance of Cash Flow Analysis 6.2 Prepare a Cash Flow Statement and a Budget 6.3 Identify other financial tools
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3. 6-3
Cash Flow
The author defines Cash Flow as “actual cash that flows into the firm, minus the cash that goes out of the firm.”
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Cash flow in a business is not the same as profit. A firm obtains profits when its sales revenue is higher than its expenses, including depreciation of assets. However, generating profits does not put cash in the bank for a business. Cash flow is one of the most critical areas in the survival of a new business.
In its simplest form a Cash Flow Statement is a comparison of cash inflows to cash outflows

4. Understanding Cash Flow
6-4
Understanding Cash Flow
The role of the Cash Flow Statement developed in the due diligence stage of a fledgling venture is substantially different from the financial analysis developed for an ongoing firm.
The viability of a new business will be determined by Cash Flow.
See Learning Outcome 6.1: Recognize the fundamental importance of cash flow analysis
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The key to success of a new venture is its ability to bring in more cash each month than it spends and to bring that cash in on a cycle that is faster than the payout cycle.
Equity-Investment into the small business by the owners of the firm
Float-the difference between when the money goes out and when the money comes in.

5. Cash Flow Versus Budgets
6-5
Cash Flow Versus Budgets
Budget example:
See Learning Outcome 6.1: Recognize the fundamental importance of cash flow analysis
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Budget-Statement that projects all the costs that will be incurred by the organization over a period of time and allocates those expenses evenly over the relevant time period. A budget projects all the costs that will be incurred by the organization over some period of time and allocates those expenses evenly over the relevant time period. A Cash Flow Statement does the exact opposite of a Budget.

6. Cash Flow Versus Budgets
6-6
Cash Flow Versus Budgets
Cash Flow example:
See Learning Outcome 6.1: Recognize the fundamental importance of cash flow analysis
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The company which started with $10,000 from the founders was completely out of cash by March and had a negative cash position of almost $2000 in April. The firm was able to cover this shortfall with credit card cash advances and was able to survive.
As a rule of thumb, calculate the entire cash flow projection without adding in any equity investment, and look for the point where the ending balance is at its lowest. Take that number and multiply it by 150 percent, because it always takes more cash than one expects.

7. Finalized Example Cash Flow Statement
6-7
Finalized Example Cash Flow Statement
See Learning Outcome 6.1: Recognize the fundamental importance of cash flow analysis
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Notice that the April low point for the ending balance is ($12,473) (see table 6.2). Multiplying that number by 150% yields a recommended initial investment of roughly $19,000 (see table 6.3). With that number inserted as the initial equity investment, the cash balance remains well above zero.

8. 6-8
Deviation Analysis
Deviation Analysis- analysis of the differences between the predicted and the actual performance.
See Learning Outcome 6.1: Recognize the fundamental importance of cash flow analysis
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Once the business venture actually begins operations, actual cash flow should be compared monthly to the projected cash flow statement in order to produce a deviation analysis.

9. Developing Cash Flow Statements: Expenses
6-9
Developing Cash Flow Statements: Expenses
Salaries
Basic Benefits
Taxes/Fees
Cost of Goods Sold
Utilities
Security System
Tools/Machinery
Office Supplies
Travel Expenses
Insurance
Advertising
Furniture and Computers
Telephones
Maintenance
Cleaning
Rent/Mortgage
See Learning Outcome 6.2: Prepare a Cash Flow Statement and a Budget
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Generating the cash flow statement should actually begin with the expenses of the organization because they are easier to forecast than revenues.
Revenues should be separated into as many categories as possible to provide maximum insight to the owner. Separating out revenue lines aids both in predicting where the firm’s revenues will come from and in analyzing the actual revenue sources for the new firm.

10. Developing Cash Flow Statements: Revenues
6-10
Developing Cash Flow Statements: Revenues
See Learning Outcome 6.2: Prepare a Cash Flow Statement and a Budget
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Revenues should be separated into as many categories as possible to provide maximum insight to the owner. Separating out revenue lines aids both in predicting where the firm’s revenues will come from and in analyzing the actual revenue sources for the new firm.
Sensitivity Analysis-an analysis by the small business person of the best- and worst-case scenarios, and a judgment of how sensitive the firm would be to such swings (see page 118 for an example).

11. 6-11
Other Financial Tools
Balance Sheet-a summary of the assets and liabilities of the business
Income Statement-projects the future income of the organization
Break–Even Analysis-a tool for estimating when a business’s income exceeds is expenses
Pro Forma-a term describing estimates of what the balance sheets and income statement will look like
See Learning Outcome 6.3: Identify other financial tools
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Balance Sheet (see table 6.7)
Current Assets-Assets such or those assets that can be easily converted to cash
Fixed Assets-Assets that have a physical presence, including land, buildings, office equipment, machinery, and vehicles
Current Liabilities-Liabilities or debts that the small business has to pay within one year
Long-term Liabilities-Liabilities that are owed by the business and are ultimately due more than a year from the current date.
Income Statement-revenue of the firm minus the expenses (see table 6.8)

12. Break-Even Analysis Classic Break-Even Diagram 6-12
See Learning Outcome 6.3: Identify other financial tools
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Fixed Costs-costs that must be paid no matter how many goods are sold, such as rent.
Variable Costs-costs that vary according to how many goods are produced
The traditional Fortune 500 approach to break-even analysis would suggest that once revenues exceed the total of the fixed costs plus the variable costs, then the firm has reached break-even.

13. Break-Even Analysis Entrepreneurial Break-Even Diagram 6-13
See Learning Outcome 6.3: Identify other financial tools
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Entrepreneurial ventures need to operate in a fundamentally different manner. The breakeven is calculated using the cash flow rather than profit.
Time value of money-the value of money over time at a given rate of inflation or other type of return. Calculated as the value of your investment in time and money if you did not do the proposed venture.

14. Summary Cash Flow Statements-including inputs and outputs
6-14
Summary
Cash Flow Statements-including inputs and outputs
We examined a Balance Sheet and an Income Statement
Brief examination of Entrepreneurial Break-Even Analysis.
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