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1、Author:Collins Qian,Contributor:Chris Nelson,bc,Cash Flow,March 1998,Copyright 1998 Bain&Company,Inc.,2,CU7010598KRA,Cash Flow,Agenda,The importance of cash flowTypes of cash flowApplicationsCash flow stepsExerciseKey takeaways,3,CU7010598KRA,Cash Flow,Agenda,The importance of cash flowTypes of cash
2、 flowApplicationsCash flow stepsExerciseKey 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 market value
3、 of a company is equal to the present value of its expected future cash flowsVarious stakeholders demand cashinvestors demand CASH returnssuppliers and employees require CASH compensationdebtholders demand CASH paymentsAccounting methods can be used to“manage”earnings;CASH is harder to manipulate,Ca
4、sh 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 cashIn 1988,General Motors made at least four decisions that impacted earnings but not cash,Earnings do not equal cash flow.,*Earnings
5、 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,None,Total:,$1,757MM,None
6、,7,CU7010598KRA,Cash Flow,Agenda,The importance of cash flowTypes of cash flowApplicationsCash flow stepsExerciseKey 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 activities.,Operating cash flow,Invest
7、ing 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 profitsDecrease in working capital,Sale of fixed assets,Long-term issuance of shares,Examples of sour
8、ces:,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 divisions or companies,or investme
9、nts 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 structurecash generation ability is independent of how a firm is financedIt excludes one-time eventsthese are not relat
10、ed to a firms recurring operationsOperating cash flow is used to measure the strategic value of a businessfor company valuations,operating and investing cash flows are used,not financing cash flow,Bain is usually more interested in operating and investing*cash flow than in financing cash flow,Operat
11、ing 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 flowcash is used to replace assets as they wear outif a business is to
12、grow,additional assets must be acquiredin some cases,the cash used to 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,fai
13、ling a positive operating cash flow,external financing is usedPure financing 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
14、 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 acquisition of non-current assets.,11,CU7010598KRA,Cash Flow,Fina
15、ncing Cash Flow,Major types of financing cash flow include:debt-related transactionschanges in long-term debtinterest income and expenseequity-related transactionschanges in common and preferred stockdividendsshort-term investmentslong-term asset and liability transactionspurchase or sale of a divis
16、ion or companychanges 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,CU7010598KRA,Cash Flow,Statement of Cash Flows,The SCF is divided into three sections:
17、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 much detail for example,i
18、t 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 of data for constructing cash flows,but sometimes it does not have the detail required for th
19、e analysis being done.,13,CU7010598KRA,Cash Flow,Agenda,The importance of cash flowTypes of cash flowApplicationsCash flow stepsExerciseKey takeaways,14,CU7010598KRA,Cash Flow,Applications,Bain case teams use cash flow(CF)analysis to value investments/acquisitions,to improve the health of business u
20、nits,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?What are we willing to pay(in cash)for that investment/acquisition?,How healthy is a business unit?What f
21、actors 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 clients portfolio of businesses?How does this effect the clients overall cash position/outlook?What
22、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 flowTypes of cash flowApplicationsCash flow stepsExerciseKey takeaways,16,CU7010598KRA,Cash Flow,Cash Flow Cookbook,*Cash is defined a
23、s 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.Taxes paid6.Tax impact of
24、 interest income/expenseOperating cash flow,Bain case teams use the following cash flow cookbook:,-=,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/shar
25、es12.Dividends13.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,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
26、flowTypes of cash flowApplicationsCash flow stepsExerciseKey takeaways,18,CU7010598KRA,Cash Flow,Exercise-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 here
27、after should not be used to analyze Gillettes financial performance.,Net Sales,Cost of Sales,Gross Profit,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
28、,Income Statement:The New England Razor Company*,Use the following data to calculate the cash flow for 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,R
29、eceivables,Inventories,Deferred income taxes*,Prepaid expenses,Total Current Assets,Property,Plant&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,Lo
30、ng-Term Debt,Deferred Income Taxes*,Other Long-Term Liabilities,Dividends Payable,Stockholders 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,
31、$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,$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,$8,544.3,Balance SheetDe
32、cember 31,1996 and 1995(in$MM),1996,Exercise-Background(p.2),20,CU7010598KRA,Cash Flow,Property,Plant and EquipmentLess accumulated depreciationNet 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:Divide
33、ndsThe company declared dividends of$484.2MM in 1996,Note 3:Sale of assetsA loss of$22MM was incurred on equipment sold during the yearThe 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
34、.,21,CU7010598KRA,Cash Flow,Operating 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/incr
35、ease in working capital(excluding cash)5.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
36、 stocks/shares12.Dividends13.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-Profit Befo
37、re Interest and Tax,Where 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 tax,If income statement is provided,pick number from income statementIf inc
38、ome 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 taxes=Profit before inter
39、est 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 before interest and tax.,*Shown as
40、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 NotesOther Non-Cash Income/Expenses-Notes
41、,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 payable)Ask two questions:was the item non-cash?w
42、as 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 taxIf answer to either question is no,make no adjustm
43、ents,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 thereIf not,calculate depreciation:Accumulated depreciation at year end-Accumulated
44、 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 asset,26,CU7010598KRA,Step 2-Depreciation-Answer(p.1),Depreciation from sal
45、e 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 depreciation at year beginning+depreciation from sale of asset=$2,628.4MM-$2,428.4MM+$181.1MM=$381.1MM,Ca
46、sh 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.2),The depreciation expense for the year can be calculated from the balance sheet and notes.,-,+,=,28,CU7010598KRA,Cas
47、h 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 tax in the operating cash flow.,29,CU7010598KRA,Cash Flow,Step 4-Change in Working Capital(Excluding Cash),Where to find:,Pro
48、cess:,Balance sheet,Working capital=current assets-current liabilitiesReview each current asset and current liability,Include:,Exclude:,Cash and cash equivalentsTax itemsinclude in taxes paid calculation(Step 5)Financing assets and liabilities,such as:interest payabledividends payablecurrent portion
49、 of long-term debt,Operating assets and liabilities,30,CU7010598KRA,Cash Flow,Working Capital,Current Assets and Liabilities,Included in Change in Working Capital Calculation,Current assetscashmarketable securitiesinventoryaccounts receivablepre-paid expensesdeferred income taxes,Current liabilities
50、accounts payableaccrued expensesloans payableincome taxes payablecurrent portion of long-term debtinterest payabledividends payable,Included in cash,not working capital,Included in cash,not working capital,Included in operating cash flow,but not in working capital,Included in financing cash flow,Not
