Financial AnalysisFinancial Analysis

LAP 6LAP 6

ObjectivesObjectives

Describe the importance of cash flow.Describe the importance of cash flow.

Describe the components of a cash Describe the components of a cash flow statement.flow statement.

Describe the importance of cash flow.Describe the importance of cash flow.

ObjectivObjectivee

• When you owe more money than When you owe more money than you have–you have–

Your cash flow is out of balance.Your cash flow is out of balance.

You may not be able to pay all of You may not be able to pay all of your bills.your bills.

You may need to borrow money from You may need to borrow money from a family member or a friend.a family member or a friend.

Not a situation you want to be in Not a situation you want to be in very oftenvery often

• Businesses sometimes are in the Businesses sometimes are in the same situation.same situation.

Businesses monitor their cash flow Businesses monitor their cash flow to avoid this problem.to avoid this problem.

Importance of Cash FlowImportance of Cash Flow

• Cash—it makes the world go Cash—it makes the world go around.around.

• Businesses need cash to operate.Businesses need cash to operate.

• Need to manage their cash flow:Need to manage their cash flow:

The movement of funds into The movement of funds into and out of a businessand out of a business

Determine the amount of Determine the amount of cash they have to work with cash they have to work with at any given timeat any given time

Cash Flows Into a Business Cash Flows Into a Business From Five Main SourcesFrom Five Main Sources

• Start-up moneyStart-up money

• Sale of productsSale of products

• LoansLoans

• InterestInterest

• Sale of assetsSale of assets

Main Sources of Cash Main Sources of Cash Flowing Out of a BusinessFlowing Out of a Business

• Operating expensesOperating expenses

• Cost of goods soldCost of goods sold

• AssetsAssets

• Loan paymentsLoan payments

• TaxesTaxes

• MiscellaneousMiscellaneous

Monitor Cash FlowMonitor Cash Flow

To build a cash surplus when To build a cash surplus when sales are upsales are up

• Creates a safety net for the Creates a safety net for the slow timeslow time

• Keeps the cash flow Keeps the cash flow balancedbalanced

Describe the components of aDescribe the components of acash flow statement.cash flow statement.

ObjectivObjectivee

Cash Flow StatementCash Flow Statement

• Best guess, or estimate, as to when, Best guess, or estimate, as to when, where, and how much money will where, and how much money will flow into and out of the businessflow into and out of the business

• Tells the business– Tells the business–

When money will flow inWhen money will flow in

Where money will flow in fromWhere money will flow in from

How much money will flow inHow much money will flow in

Finding Necessary Finding Necessary InformationInformation

• May be a problem for new businessesMay be a problem for new businesses

Do not have previous financial dataDo not have previous financial data

Often rely on figures obtained through marketing Often rely on figures obtained through marketing researchresearch

• Existing businesses have financial information.Existing businesses have financial information.

Review previous profit-and-loss statements.Review previous profit-and-loss statements.

Analyze industry trends and predictions.Analyze industry trends and predictions.

Components of aComponents of aCash Flow StatementCash Flow Statement

• Beginning cash balanceBeginning cash balance Money available at the beginning of Money available at the beginning of

each montheach month

• Cash receiptsCash receipts Specific sources of money flowing Specific sources of money flowing

into the businessinto the business

• Total cash receiptsTotal cash receipts All of the sources of income listed All of the sources of income listed

under cash receiptsunder cash receipts

• Total cash availableTotal cash available Cash available to spend each monthCash available to spend each month

• Cash paymentsCash payments Sources of cash flowing out of the Sources of cash flowing out of the

businessbusiness

• Total cash paid outTotal cash paid out Determined by adding all of a Determined by adding all of a

business’s cash paymentsbusiness’s cash payments

• Ending cash balanceEnding cash balance Cash a business has left at the end Cash a business has left at the end

of the monthof the month

What This MeansWhat This Means

• Gives a business a good idea of Gives a business a good idea of amount of money that will flow in amount of money that will flow in and outand out

Positive cash flow means there is Positive cash flow means there is enough money on hand to meet enough money on hand to meet monthly obligations.monthly obligations.

Negative cash flow means the Negative cash flow means the business will need to obtain business will need to obtain additional money to continue additional money to continue operating.operating.

• Indicates the financial condition Indicates the financial condition of a businessof a business

Businesses with extra cash are Businesses with extra cash are able to invest.able to invest.

Investments lead to growth and Investments lead to growth and expansion.expansion.

This generates more sales and This generates more sales and more cash.more cash.

Result is a prosperous business Result is a prosperous business that has cash to continue growing.that has cash to continue growing.

• List all of your income for the month.

• List all of your expenses, even the small ones.

• Total the amounts on each list.

• Income should be more than expenses.

• If not, there are two options: Reduce your expenses.

Find a way to bring in more income.

Steps to managing your cash flow

• What if they present information in a way that is legal but not quite ethical?

• What if they get the loan, but the bank finds out?

Bank might not trust the business in the future.

May always be concerns about accuracy of financial information

Business might have trouble getting other loans.

Businesses often use cash flow statements to obtain credit.

• Was it worth it to be less than completely truthful?

• Was there another way to be ethical and still get the loan?

MarkED

Acknowledgments

Original DevelopersChristopher C. Burke,

Lynn Malowney, MarkED

Version 1.0

Copyright © 2007MarkED Resource Center

Digital-based photography sources:

DIGITAL STOCK CORP.;Business & IndustryObj. B: #013Photos copyright 1998 Corbis Corp.750 Second Street, Encinitas, CA 92024

DIGITAL VISION; Teenager TodayObj. B: #130271Photos copyright Digital Vision Ltd., all rights reserved. 833 Fourth Ave. SW, Suite 800 Calgary, AB, Canada T2P 3T5

Copyright:

All photographic digital images on this CD are owned by the aforementioned photographic resources or their licensors and are protected by the United States copyright laws, international treaty provisions, and applicable laws. No title to or intellectual property rights to the images on this CD are transferred to you. These sources retain all rights and are not to be used, digitally copied, transferred, or manipulated in any way. To do so is a violation of federal copyright laws.