Author:CollinsQianContributor:ChrisNelsonbcCashFlowMarch1998Copyright©1998Bain&Company,Inc.2CU7010598KRAbcBOSCopyright©1998Bain&Company,Inc.CashFlowAgenda•Theimportanceofcashflow•Typesofcashflow•Applications•Cashflowsteps•Exercise•Keytakeaways3CU7010598KRAbcBOSCopyright©1998Bain&Company,Inc.CashFlowAgenda•Theimportanceofcashflow•Typesofcashflow•Applications•Cashflowsteps•Exercise•Keytakeaways4CU7010598KRAbcBOSCopyright©1998Bain&Company,Inc.CashFlowWhatisCashFlow?Cashflowdescribesthemovementofcashinto(sources)andoutof(uses)acompany.SourcesofcashCompanyUsesofcash$$$$$$$$5CU7010598KRAbcBOSCopyright©1998Bain&Company,Inc.CashFlowWhyDoWeCareAboutCash?•Themarketvalueofacompanyisequaltothepresentvalueofitsexpectedfuturecashflows•Variousstakeholdersdemandcash–investorsdemandCASHreturns–suppliersandemployeesrequireCASHcompensation–debtholdersdemandCASHpayments•Accountingmethodscanbeusedto“manage”earnings;CASHishardertomanipulateCashisKing!Cashflowisthemeasureofacompany’sstrategicvalue.6CU7010598KRAbcBOSCopyright©1998Bain&Company,Inc.CashFlowEarningsvs.CashFlow*•Someaccountingdecisionsimpactearnings,butnotcash–In1988,GeneralMotorsmadeatleastfourdecisionsthatimpactedearningsbutnotcashEarningsdonotequalcashflow.*Earningsarealsocalledaftertaxprofitsornetincome•Successfulhighgrowthcompaniestendtohavehighearnings,butlowcashflow;successfullowgrowthcompaniestendtohavelowearnings,buthighcashflowAccountingDecision•Extendedusefulplantlifefrom35to45yearschedule•Changedthewayitaccountedforitspensionplan•Adjusteditsinventoryvaluationpolicy•ChangedtheresidualvalueassumptionforcarsitleasedEarningsImpact$790MM$480MM$217MM$270MMCashImpactNoneNoneNoneNoneTotal:$1,757MMNone7CU7010598KRAbcBOSCopyright©1998Bain&Company,Inc.CashFlowAgenda•Theimportanceofcashflow•Typesofcashflow•Applications•Cashflowsteps•Exercise•Keytakeaways8CU7010598KRAbcBOSCopyright©1998Bain&Company,Inc.CashFlowTypesofCashFlowNetcashflowisequaltothesumofthecashflowsfromoperating,investing,andfinancingactivities.OperatingcashflowInvestingcashflowFinancingcashflow•Abilityofacompany’srecurringoperationstogeneratecash•Abilityofacompany’sinvestmentdecisionstogeneratecash•Howacompanyfundsitsoperations•Operatingprofits•Decreaseinworkingcapital•Saleoffixedassets•Long-termissuanceofsharesExamplesofsources:•Operatinglosses•Increaseinworkingcapital•Purchaseoffixedassets•Repaymentofloans•PaymentofdividendsExamplesofuses:9CU7010598KRAbcBOSCopyright©1998Bain&Company,Inc.CashFlowOperatingCashFlow*Investingactivitiesnotrelatedtoongoingoperations(suchasthepurchaseorsaleofdivisionsorcompanies,orinvestmentsinunrelatedbusinesses)arenotincludedininvestingcashflow.Theyareincludedinfinancingcashflow.•Operatingcashflowexcludesallcashflowsrelatedtoafirm’scapitalstructure–cashgenerationabilityisindependentofhowafirmisfinanced•Itexcludesone-timeevents–thesearenotrelatedtoafirm’srecurringoperations•Operatingcashflowisusedtomeasurethestrategicvalueofabusiness–forcompanyvaluations,operatingandinvestingcashflowsareused,notfinancingcashflow•Bainisusuallymoreinterestedinoperatingandinvesting*cashflowthaninfinancingcashflowOperatingcashflowmeasurestheabilityofabusiness’srecurringoperationstogeneratecash.10CU7010598KRAbcBOSCopyright©1998Bain&Company,Inc.CashFlowInvestingCashFlow•Investmentsinongoing...
