1、1CU7030298IMB Author:Collins QianContributor:Chris Nelson bcCash FlowMarch 2019Copyright 1998 Bain&Company,Inc.1 C U 7 0 3 0 2 9 8 I MB A u t h o r:2CU7010598KRAAgenda The importance of cash flowTypes of cash flowApplicationsCash flow stepsExerciseKey takeaways2 C U 7 0 1 0 5 9 8 K R A C a s h F l o
2、 w A g e n d a T3CU7010598KRAAgenda The importance of cash flowTypes of cash flowApplicationsCash flow stepsExerciseKey takeaways3 C U 7 0 1 0 5 9 8 K R A C a s h F l o w A g e n d a T4CU7010598KRAWhat is Cash Flow?Cash flow describes the movement of cash into(sources)and out of(uses)a company.Sourc
3、es of cashCompanyUses of cash$4 C U 7 0 1 0 5 9 8 K R A C a s h F l o w Wh a t i s 5CU7010598KRAWhy Do We Care About Cash?The market value of a company is equal to the present value of its expected future cash flowsVarious stakeholders demand cashinvestors demand CASH returnssuppliers and employees
4、require CASH compensationdebtholders demand CASH paymentsAccounting methods can be used to“manage”earnings;CASH is harder to manipulateCash is King!Cash flow is the measure of a companys strategic value.5 C U 7 0 1 0 5 9 8 K R A C a s h F l o w Wh y D o W6CU7010598KRAEarnings vs.Cash Flow*Some accou
5、nting decisions impact earnings,but not cashIn 1988,General Motors made at least four decisions that impacted earnings but not cashEarnings do not equal cash flow.*Earnings are also called after tax profits or net incomeSuccessful high growth companies tend to have high earnings,but low cash flow;su
6、ccessful low growth companies tend to have low earnings,but high cash flowAccounting DecisionExtended useful plant life from 35 to 45 year scheduleChanged the way it accounted for its pension planAdjusted its inventory valuation policyChanged the residual value assumption for cars it leasedEarnings
7、Impact$790MM$480MM$217MM$270MMCash ImpactNoneNoneNoneNoneTotal:$1,757MMNone6 C U 7 0 1 0 5 9 8 K R A C a s h F l o w E a r n i n g s7CU7010598KRAAgenda The importance of cash flowTypes of cash flowApplicationsCash flow stepsExerciseKey takeaways7 C U 7 0 1 0 5 9 8 K R A C a s h F l o w A g e n d a T
8、8CU7010598KRATypes of Cash Flow Net cash flow is equal to the sum of the cash flows from operating,investing,and financing activities.Operating cash flowInvesting cash flowFinancing cash flowAbility of a companys recurring operations to generate cashAbility of a companys investment decisions to gene
9、rate cashHow a company funds its operationsOperating profitsDecrease in working capitalSale of fixed assetsLong-term issuance of shares Examples of sources:Operating losses Increase in working capitalPurchase of fixed assetsRepayment of loans Payment of dividends Examples of uses:8 C U 7 0 1 0 5 9 8
10、 K R A C a s h F l o w T y p e s o f9CU7010598KRAOperating Cash Flow*Investing activities not related to ongoing operations(such as the purchase or sale of divisions or companies,or investments in unrelated businesses)are not included in investing cash flow.They are included in financing cash flow.O
11、perating cash flow excludes all cash flows related to a firms capital structurecash generation ability is independent of how a firm is financedIt excludes one-time eventsthese are not related to a firms recurring operationsOperating cash flow is used to measure the strategic value of a businessfor c
12、ompany valuations,operating and investing cash flows are used,not financing cash flowBain is usually more interested in operating and investing*cash flow than in financing cash flowOperating cash flow measures the ability of a businesss recurring operations to generate cash.9 C U 7 0 1 0 5 9 8 K R A
13、 C a s h F l o w O p e r a t i n10CU7010598KRAInvesting Cash FlowInvestments in ongoing operations -property,plant and equipment-are included in investing cash flowcash is used to replace assets as they wear outif a business is to grow,additional assets must be acquiredin some cases,the cash used to
14、 acquire these assets is generated from the sale of existing noncurrent assetssuch cash inflows,however,seldom cover the entire cost of asset acquisitions.Often times cash flow from operations is used to finance acquisitions,or,failing a positive operating cash flow,external financing is usedPure fi
15、nancing activities are not included in investing cash flow.They are included in financing cash flowpurchase or sale of divisions or companiesinvestments in unrelated businessesInvesting cash flows relating to ongoing operations are used as a measure of the strategic value of a business.Those that ar
16、e purely financing/investment mechanisms are used to evaluate the financial strategy of the businessInvesting cash flow measures the use of a businesss cash for the acquisition of non-current assets.1 0 C U 7 0 1 0 5 9 8 K R A C a s h F l o w I n v e s t i11CU7010598KRAFinancing Cash FlowMajor types
17、 of financing cash flow include:debt-related transactions8changes in long-term debt8interest income and expenseequity-related transactions8changes in common and preferred stock8dividends8short-term investmentslong-term asset and liability transactions8purchase or sale of a division or company8change
18、s in long-term liabilitiesFinancing 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.1 1 C U 7 0 1 0 5 9 8 K R A C a s h F l o w F i n a n c i12CU7010598KRAStatement of Cash FlowsThe SCF is divide
19、d into three sections:operating,investing,and financingEach section shows sources and uses of funds for the accounting periodThe SCF shows the amounts fordepreciation and amortizationcapital expenditurestaxes paiddividends paidIt does not show sources and uses by business unitIt does not provide muc
20、h detail for example,it does not show capital expenditures by project,nor individual equipment purchasesThe SCF is not a substitute for cash flow analysisThe statement of cash flows(SCF)found in annual reports is a good source of data for constructing cash flows,but sometimes it does not have the de
21、tail required for the analysis being done.1 2 C U 7 0 1 0 5 9 8 K R A C a s h F l o w S t a t e me13CU7010598KRAAgenda The importance of cash flowTypes of cash flowApplicationsCash flow stepsExerciseKey takeaways1 3 C U 7 0 1 0 5 9 8 K R A C a s h F l o w A g e n d a 14CU7010598KRAApplications Bain
22、case teams 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 analysisPortfolio managementWhat is the cash generation potential of an investment/acquisition?Wha
23、t 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 generators in a
24、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 denominatorCF=measuring stickCF=portfolio tool1 4 C U 7 0 1 0 5 9 8 K R A C a s h F l o w A p p l i c a15CU7010598KRAAgenda The importance o
25、f cash flowTypes of cash flowApplicationsCash flow stepsExerciseKey takeaways1 5 C U 7 0 1 0 5 9 8 K R A C a s h F l o w A g e n d a 16CU7010598KRACash 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
26、 sheet+/-+/-+/-=1.Profit before interest and tax(PBIT)2.Depreciation3.Other non-cash expenses/income4.Decrease/increase in working capital(excluding cash)5.Taxes paid6.Tax impact of interest income/expenseOperating cash flowBain case teams use the following cash flow cookbook:-=7.Capital expenditure
27、sInvesting cash flow+/-+/-+/-+/-+/-=8.Interest income/expense9.Tax impact of interest expense/income10.Increase/decrease in long-term debt11.Increase in outstanding stocks/shares12.Dividends13.Changes in other accountsFinancing cash flow14.Reconcile with change in cash*from Balance SheetNet cash flo
28、wSource*I/SSCF,B/S and NotesNotesB/SI/S,B/SI/SSCF,B/S and NotesI/SI/SB/SB/SSCF,B/S,and NotesB/S,I/SB/S1 6 C U 7 0 1 0 5 9 8 K R A C a s h F l o w C a s h F l17CU7010598KRAAgenda The importance of cash flowTypes of cash flowApplicationsCash flow stepsExerciseKey takeaways1 7 C U 7 0 1 0 5 9 8 K R A C
29、 a s h F l o w A g e n d a 18CU7010598KRAExercise-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 p
30、erformance.Net SalesCost of SalesGross ProfitSG&AProfit from OperationsInterest ExpenseIncome before taxesIncome TaxesNet Income1996$9,697.7MM($3,681.7MM)$6,016.0MM($4,379.7MM)$1,636.3MM($111.3MM)$1,525.0MM($576.3MM)$948.7MMIncome Statement:The New England Razor Company*Use the following data to cal
31、culate the cash flow for The New England Razor Company:1 8 C U 7 0 1 0 5 9 8 K R A C a s h F l o w E x e r c i s19CU7010598KRA*Deferred taxes can be a liability account,an asset account,or both(as is the case here).AssetsCurrent AssetsCashMarketable securitiesReceivablesInventoriesDeferred income ta
32、xes*Prepaid expensesTotal Current AssetsProperty,Plant&EquipmentLiabilities and Stockholders EquityCurrent LiabilitiesLoans payableCurrent portion of Long-Term debtAccounts payable and accrued expensesIncome taxes payableTotal Current LiabilitiesLong-Term DebtDeferred Income Taxes*Other Long-Term Li
33、abilitiesDividends PayableStockholders EquityCommon stockAdditional Paid-in CapitalRetained EarningsTreasury stockTotal 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)$4,490.9199
34、5$81.6$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$8,544.3Balance SheetDecember 31,1996 and 1995(in$MM)1996Exercise-Background(p.2)1 9 C U 7 0 1 0 5 9 8 K R A C a s h F l o w*D e f e r
35、 r20CU7010598KRA Property,Plant and EquipmentLess accumulated depreciationNet Property,Plant,and Equipment1996(in$MM)$7,820.4$2,628.4$5,192.01995(in$MM)$6,885.0$2,428.4$4,456.6Note 1:Property,Plant and EquipmentNote 2:DividendsThe company declared dividends of$484.2MM in 1996Note 3:Sale of assetsA l
36、oss of$22MM was incurred on equipment sold during the yearThe equipment had an original cost of$244.0MM and was sold for$40.9MMExercise-Background(p.3)Notes to the financial statements are a critical source of information.2 0 C U 7 0 1 0 5 9 8 K R A C a s h F l o w P r o p e r21CU7010598KRAOperating
37、 Cash Flow*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 interest and tax(PBIT)2.Depreciation3.Other non-cash expenses/income4.Decrease/increase in working capital(excluding cash)5
38、.Taxes paid6.Tax impact of interest income/expenseOperating cash flow-=7.Capital expendituresInvesting cash flow+/-+/-+/-+/-+/-=8.Interest income/expense9.Tax impact of interest expense/income10.Increase/decrease in long-term debt11.Increase in outstanding stocks/shares12.Dividends13.Changes in othe
39、r accountsFinancing cash flow14.Reconcile with change in cash*from Balance SheetNet cash flowSource*I/SSCF,B/S and NotesNotesB/SI/S,B/SI/SI/SI/SB/SB/SB/S,I/SB/SSCF,B/S and NotesSCF,B/S and Notes2 1 C U 7 0 1 0 5 9 8 K R A C a s h F l o w O p e r a t i22CU7010598KRAStep 1-Profit Before Interest and T
40、axWhere to find:Process:Comments:Income statementIt can be labeled in many different ways,including profit before interest and tax,profit from operations,operating profit,and earnings before interest and taxIf income statement is provided,pick number from income statementIf income statement is not p
41、rovided,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 taxes=Profit before interest and tax(PBIT)The g
42、oal is to get profit before interest payments,tax payments,and extraordinary items2 2 C U 7 0 1 0 5 9 8 K R A C a s h F l o w S t e p 1 23CU7010598KRAStep 1-Profit Before Interest and Tax-AnswerProfit before interest and tax*:$1,636.3MM1996Operating cash flow begins with profit before interest and t
43、ax.*Shown as profit from operations on The New England Razor Companys income statement2 3 C U 7 0 1 0 5 9 8 K R A C a s h F l o w S t e p 1 24CU7010598KRASteps 2 and 3-Depreciation and Other Non-Cash Income/ExpensesWhere to find:Process:Depreciation-statement of cash flows,or calculate from Balance
44、Sheet and NotesOther Non-Cash Income/Expenses-NotesReview 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
45、 payable)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 taxe.g.,depreciation -add back to profit before interest and taxe.g.,loss on sale of asset -add back to profit before interest and t
46、axIf answer to either question is no,make no adjustments 2 4 C U 7 0 1 0 5 9 8 K R A C a s h F l o w S t e p s 225CU7010598KRAStep 2-DepreciationWhere to find:Process:Statement of cash flows,or calculate from Balance Sheet and NotesIf depreciation is provided in the statement of cash flows,pick numb
47、er from thereIf not,calculate depreciation:Accumulated depreciation at year end-Accumulated depreciation at year beginning+Depreciation from sale of asset=Depreciation expense for the yearDepreciation from sale of asset:Original cost of asset-Proceeds from sale of asset-Losses incurred=Depreciation
48、from sale of asset2 5 C U 7 0 1 0 5 9 8 K R A C a s h F l o w S t e p 2 26CU7010598KRAStep 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=$181.1MMDepreciation expense for 1996 =Accumulated de
49、preciation at year end-accumulated depreciation at year beginning+depreciation from sale of asset=$2,628.4MM-$2,428.4MM+$181.1MM=$381.1MMCash FlowDepreciation is a non-cash expense.Therefore,it is added to profit before interest and tax in the operating cash flow.2 6 C U 7 0 1 0 5 9 8 K R A S t e p
50、2 -D e p r e c27CU7010598KRAStep 2-Depreciation-Answer(p.2)Accumulateddepreciation(year end)Accumulateddepreciation(year beginning)Depreciation fromsale of assetsDepreciation expense$2,628.4MM($2,428.4MM)$181.1MM$381.1MM$0$500$1,000$1,500$2,000$2,500$3,000 Millions of DollarsThe depreciation expense
