Cash Flow Management

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Cash Flow Management
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Cash Management

• Understand that profits do not equal cash
• Understand your Cash Flow Cycle
• Put cash flow internal controls into place
• Monitor and improve

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CLASSIFICATION OF CASH FLOWS

• Transactions and other events characteristic of
  each kind of activity are as follows
• 1 Operating activities include the cash effects
  of transactions that create revenues and
  expenses and thus enter into the determination of
  net income.
• 2 Investing activities include a) acquiring and
  disposing of investments and productive
  long-lived assets, and b) lending money and
  collecting the loans.
• 3 Financing activities include a) obtaining cash
  from issuing debt and repaying the amounts
  borrowed, and b) obtaining cash from
  stockholders and providing them with a return on
  their investment.

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Indirect Method - SCF

• Begin with net income from income statement
• Adjust net income to the cash basis to arrive at
  net cash flow from operations
• Investing and financing activities are the same
  as the direct method
• Used by the vast majority of companies

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Rockyfellow, Inc. Statement of Cash Flows For the
Year Ended December 31, 2001 (Indirect Method)
Cash flow from operating activities Net
income 16,270 Adjusted for Depreciation
and amortization 12,650 Increase in
receivables (8,580) Decrease in
merchandise 950 Increase in
supplies (2,750) Increase in prepaid
insurance (2,340) Increase in accounts
payable 2,160 Decrease in wages
payable (1,410) Increase in interest
payable 1,330 Decrease in income tax
payable (600) Net cash from operating
activities 17,680
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Cash flow from investing activities Purchase
of plant assets (53,500) Sale of plant assets
8,190 Net cash flow from investing
activities (45,310) Cash flow for financing
activities Proceeds from issuing common
stock 25,000 Proceeds from issuing long-term
debt 32,000 Payment of long-term
debt (20,470) Payment of dividends
(5,000) Net cash flow from financing
activities 31,530 Net increase in cash 3,900
Cash balance, December 31, 2000 11,700 Cash
balance, December 31, 2001 15,600
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Cash Flow Patterns and the Financial Health of a
Company
Operating Cash Flows are Positive Investing Cash
Flows are Negative Financing Cash Flows are
Positive
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Cash Flow Patterns and the Financial Health of a
Company
Operating Cash Flows are Negative Investing Cash
Flows are Positive Financing Cash Flows are
Positive
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Cash Flow Patterns and the Financial Health of a
Company
Operating Cash Flows are Positive Investing Cash
Flows are Positive or Negative Financing Cash
Flows are Negative
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Cash Flow Patterns and the Financial Health of a
Company
Operating Cash Flows are Positive or
Negative Investing Cash Flows are
Positive Financing Cash Flows are Negative
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Operating Cash Flow Margin

• Operating Cash Flows
• Sales
• How much cash is being generated for every dollar
  of sales.

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Cash Flow Cycle

• Order goods
• Receive goods / invoice
• Pay invoice
• Sell goods
• Deliver goods
• Send invoice
• Receive payment

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Cash Conversion Cycle

• Number of days inventory on hand
• Days in Accounts Receivable (DSO)
• Operating Cycle
• - Days in Payables
• Cash conversion Cycle