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1、 Author: Collins QianContributor: Chris Nelson bcCash FlowMarch 1998Copyright 1998 Bain & Company, Inc. 1CU7030298IMBCash FlowAgenda The importance of cash flowTypes of cash flowApplicationsCash flow stepsExerciseKey takeaways2CU7010598KRACash FlowAgenda The importance of cash flowTypes of cash flow
2、ApplicationsCash flow stepsExerciseKey takeaways3CU7010598KRACash FlowWhat is Cash Flow? Cash flow describes the movement of cash into (sources) and out of (uses) a company.Sources of cashCompanyUses of cash$4CU7010598KRACash FlowWhy Do We Care About Cash? The market value of a company is equal to t
3、he 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 manipulateCash is King!Cash flow is t
4、he measure of a companys strategic value.5CU7010598KRACash FlowEarnings vs. Cash Flow* Some accounting 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 pr
5、ofits or net incomeSuccessful high growth companies tend to have high earnings, but low cash flow; successful 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 planAd
6、justed its inventory valuation policyChanged the residual value assumption for cars it leasedEarnings Impact$790MM$480MM$217MM$270MMCash ImpactNoneNoneNoneNoneTotal:$1,757MMNone6CU7010598KRACash FlowAgenda The importance of cash flowTypes of cash flowApplicationsCash flow stepsExerciseKey takeaways7
7、CU7010598KRACash FlowTypes 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 decisio
8、ns to generate 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:8CU701059
9、8KRACash FlowOperating 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.Operating cash flow excludes all
10、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 company valuations, operating and
11、 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.9CU7010598KRACash FlowInvesting Cash FlowInvestments i
12、n 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 acquire these assets is generated from the sale of existing noncurrent
13、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 financing activities are not included in investing cash flow. They a
14、re 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 are purely financing/investment mechanisms are used to evaluate th
15、e financial strategy of the businessInvesting cash flow measures the use of a businesss cash for the acquisition of non-current assets.10CU7010598KRACash FlowFinancing Cash FlowMajor types of financing cash flow include: debt-related transactions8changes in long-term debt8interest income and expense
16、equity-related transactions8changes in common and preferred stock8dividends8short-term investmentslong-term asset and liability transactions8purchase or sale of a division or company8changes 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.11CU7010598KRACash FlowStatement of Cash FlowsThe SCF is divided into three sections: operating, investing, and financing
