Get Global: Global Cash Flow Analysis Total Training Solutions Bankers Insight Group CASH FLOW NET PROFITS DON T REPAY LOANS What will the customer do with the loan proceeds? How much will your customer need to borrow? When will they be able to generate enough cash to repay the loan? 1
CASH FLOW Net profit line on income statement will not answer these questions Net profits are not cash; they are the result of accounting techniques and policies Cash and only Cash can repay loans OPEN DISCUSSION HOW DO YOU DEFINE CASH FLOW? WHEN DO YOU USE CASH FLOW ANALYSIS? 2
STATEMENT OF CASH FLOWS Shows the cash inflows and cash outflows from operating activities, investing activities and financing activities. SOURCES OF CASH FLOW OPERATING ACTIVITIES Generally includes the cash effects of transactions and other events that enter into the determination of net income. It is the cash generated or used in producing profits or losses INVESTING ACTIVITIES Generally include the cash effects of transactions involving the acquisition or disposal of fixed assets FINANCING ACTIVITIES Generally include the cash effects of transactions and other events involving creditors and owners 3
CASH FLOW Cash can come from: Profits Sales of assets Infusion of capital Loan proceeds Extensions of additional credit from suppliers Our challenge is to identify cash inflows/outflows, analyze what has caused them and which ones are most significant, and how future cash flow may differ from the past. SOURCES OF CASH FLOW INCOME STATEMENT Sources Sales/Revenue Other Income Gain of Sale of Assets Uses Cost of Goods Sold Operating Expenses Interest Expense Income taxes Loss on Sale of Assets and Other Expenses 4
SOURCES OF CASH FLOW Sources and Uses of Cash can be determined from the Balance Sheet also. It records the place cash was either generated or spent In order to determine this you must know the Rules of Cash Flow RULES OF CASH FLOW BALANCE SHEET INCREASE DECREASE SOURCE USE Asset Liability Net Worth Asset Liability Net Worth X X X X X X 5
CASH VS. ACCRUAL Accrual Bal Sheet Adj. Cash Flow Sales 1,000,000 (400,000) A/R 600,000 COGS (700,000) 300,000 A/P (400,000) Gross Prof 300,000 200,000 Oper. Exp. (200,000) 100,000 A/E (100,000) Pre-Tax Inc 100,000 100,000 Income Tax (34,000) 14,000 ITP (20,000) Net Income 66,000 80,000 THE IMCOME STATEMENT CAUSES THE BALANCE SHEET Income Statement Sales Cost of Goods Sold Accounts Payable Balance Sheet Accounts Receivable Inventory Operating Expenses Income Tax Expense Dividend Declared 6 Accrued Expenses Income Tax Payable Dividend Payable 6
Accounting Insight Case Traditional Cash Flow 2008 2009 Net Profit 39,390 244,254 +Depreciation 11,911 6,430 +Interest 5,812 4,799 Available Cash Flow 57,113 255,483 /CPLTD + Interest 25,812 24,799 Debt Coverage Ratio 2.2x 10.2x 7
3 Fallacies with this approach 1. It is Income Statement Focused Only 2. It covers operations for one year only 3. We bankers think we are all that because we believe our customers will pay us first from Available Cash Flow before their Payroll and Suppliers TARGET POINTS 1 & 2 1. Sales 5,761,364 2. Accounts Receivable (128,002) 3. Cash Collected From Sales 5,633,362 4. Cost of Sales (Less: Dep. & Int.) (3,808,901) 5. Inventory 0 6. Accounts Payable (59,654) 7. Cash Paid for Production (3,868,555) 8. Cash From Trading Activity 1,764,807 8
TARGET POINT 3 9. Operating Exp (less Dep & Int) (1,736,461) 10. Prepaid Expenses 0 11. Accrued Expenses 0 12. Cash Paid For Operations (1,736,461) 13. Cash After Operations 28,346 TARGET POINT 4 14. Other Income (Expenses) 39,481 15. Other Assets & Liabilities 0 16. Income Tax Expense 0 17. Deferred Taxes 0 18. Income Taxes Payable 0 19. Taxes & Other Income/Expense 39,481 20. Net Cash After Operations 67,827 9
TARGET POINTS 5 & 6 21. Interest Expense (4,799) 22. Interest Payable 0 23. Dividends Declared 0 24. Dividends Payable 0 25. Cash Paid for Div/ Int. (4,799) 26. Cash After Financing Costs 63,026 27. Less: Current Portion of LTD (20,000) 28. Cash After Debt Amortization 43,026 Reconciliation of Retained Earnings Beg. Retained Earn. (2008) (103,948) +Profits for 2009 244,254 Expected Ending Ret. Earn. 140,308 Actual Ending Ret. Earn. 140,308 No Change in Capital experienced 10
TARGET POINT 7 29. Fixed Assets 0 30. Change in Long Term Investments 0 31. Intangibles /Other Assets 0 32. Cash Paid Plant & Invest. 0 33. Financing Surplus/(Requirement) 43,026 Reconciliation of Net Fixed Assets Beg. Net Fixed Assets (2008) 10,437 Less: Dep. Exp. for 2009 ( 6,430) Expected Ending Net Fixed Assets 4,007 Actual Ending Net Fixed Assets 4,007 No Additions or Reductions to Fixed Assets 11
TARGET POINTS 8 & 9 34. Short-Term Debts 0 35. Long-Term Debt 0 36. Common Stock 0 37. Change in Retained Earn 0 38. Paid In Capital 0 39. Total External Financing 0 40. Surplus/Requirement 43,026 41. Proof: Change in Cash 43,026 Long Term Debt Calculation Long Term Debt for 2009 60,000 + Notes Payable-Current Portion 20,000 80,000 - Long Term Debt for 2008 (80,000) No Change in Long Term Debt 0 12
Global Cash Flow Analysis What Is It? Business Net Cash After Operations +Personal Cash Flow - Business & Personal Debts = Global Cash Flow QUESTIONS 1. What was Mr. Smith s Cash Flow for 2009? $85,103 2. What was AI s Cash Flow for 2009? EBITDA NCAO CADA $255,483 $67,827 $43,028 13
QUESTION 3 What was AI s Annual Debt Service and Debt Coverage Ratio in 2009? EBITDA: 255,483 / 24,799 = 10.3x NCAO: 67,827 / 24,799 = 2.7x QUESTION 4 NCAO Accounting Services 67,827 Richard Smith 87,103 Total Cash Available 154,830 Debt Service: Accounting Services 24,799 Richard Smith 27,012 Total Debt Service 51,811 Total Debt Coverage 2.99x Net Cash After Debt Service: Accounting Services 43,028 Richard Smith 59,991 14
QUESTION 6 NCAO Richard Smith 87,103 Accounting Services 67,827 Add Back Rent 60,000 Cash Available 214,630 Plus: Other Tenants Income 145,347 Less: Bldg. Oper. Expenses (144,732) Net From Building: 615 Cash Available to Service Debt 215,245 QUESTION 6 Cash Available to Service Debt 215,245 Financing: Existing Personal Debts: 27,012 Existing Business Loan: 24,799 Proposed Loan: 38,712 Total Debt Service: 90,523 Debt Coverage Ratio 2.39x Global Cash Flow After Financing 125,032 15
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