Cashflow

• Companies (or Governments) only go bankrupt when they run out of cash.
• Cash is King, cash is least impacted by “the Art of Finance”.
• Net profit is not equal to cash
  • Revenue recorded on income-statement does not mean cash has been received.
  • Matching principle.
    • Expenses on income-statement are often not cash expenditures in the period.
    • Cash spent for inventory, capital equipment, etc., are not recorded on income-statement. (Expensed in later accounting periods)
  • Financing activities not reflected in income-statement. Bonds, loans, dividends paid, etc.

Quote

Entrepreneurs believe that profit is what matters most in a new enterprise. But profit is secondary. Cash flow matters most.

Profit is an opinion; Cash is a fact.

Categories

• Cash from or used in Operating Activities
  • Cash used/generated in running the business
  • Revenues, products produced, salaries, etc.
  • Overall health of company
• Cash from or used in Investing Activities
  • New equipment, factories, etc.
  • Business acquisitions or dispositions.
  • Is the company investing in itself?
• Cash from or used in Financing Activities
  • Loans, bonds, equity investment, dividends, etc.
  • How are you financing the company? By borrowing (leverage) or equity?

Operating Activities

• Start with Net Income from income-statement, add back non-cash expenses recorded in Income Statement over accounting period. Depreciation, amortization, accrued expenses, etc.
• Reflect changes in Operating Assets and Liabilities on Balance Sheet over accounting period.
  • Asset Higher / Liability Lower - subtract from cash
  • Asset Lower / Liability Higher - add to cash

Investing Activities

• Property, Plant and Equipment (PPE)
  • Cash spent to buy equipment, buildings, etc.
  • Cash received if you sell PPE
• Long-term investments (securities)
• Business acquisition/disposition
• Intangible asset acquisition/disposition

Financing Activities

• Debt — borrow to finance business
• Equity — owners provide capital/cash to finance business
  • Stock issued — cash received
  • Stock repurchased — cash spent
  • Dividends issued — cash spent