structure. Stated simply, they have to deal with the hand that has been dealt and improve it over time and provide sound proposals for financing growth.
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1
The reader may notice minor discrepancies in the calculations in this chapter. When this occurs, it is the result of rounding.
2
Other terminology used includes: CFF (cash flow from financing), CFI (cash flow from investing), and CFO (cash flow from operations).
3
The numbers used in Tables 1-1, 1-3, and 1-5 are illustrative only and not intended to represent a typical company.
4
Revenue (Rev) and Net Revenues (NetRev) will be used interchangeably throughout this book.
5
For an explanation of how Depreciation and Amortization are calculated and treated refer to the section in this chapter that deals with the Balance Sheet.
6
There are two types of interest. Interest Income (inter
1
The reader may notice minor discrepancies in the calculations in this chapter. When this occurs, it is the result of rounding.
2
Other terminology used includes: CFF (cash flow from financing), CFI (cash flow from investing), and CFO (cash flow from operations).
3
The numbers used in Tables 1-1, 1-3, and 1-5 are illustrative only and not intended to represent a typical company.
4
Revenue (Rev) and Net Revenues (NetRev) will be used interchangeably throughout this book.
5
For an explanation of how Depreciation and Amortization are calculated and treated refer to the section in this chapter that deals with the Balance Sheet.
6
There are two types of interest. Interest Income (interest earned on cash and investments) and Interest Expense (interest paid on debt). Net Interest can be either positive (interest income > interest expense) or negative (interest expense > interest income), hence the term ± NetInt.
7
Taxes Paid consist primarily of federal and state income taxes. Taxes such as municipal, wage, property, and so on are normally included in Cost of Goods Sold or Operating Expenses.
8
Depreciation and Amortization are discussed in more detail in subsequent chapters.
9
This assumption is almost always valid during the initial stages of the business planning process.
10
Here the reference is to cash flow from operations. As will be seen later, cash can be generated from working capital by reducing accounts receivable and inventory and extending accounts payable. However, once working capital has been optimized, no further cash can be generated and in this sense this cash flow is nonrecurring.
11
See Appendix C for the development of this relationship.
12
This is known as the straight line method of depreciation. Others include the declining balance and units of production methods.
13
A lot has been said here about Fixed and Intangible Assets. Don't be concerned if it strikes you as being confusing. The purpose is to expose the reader to the terminology and nothing more. All of this will be discussed in more detail in subsequent chapters.
14
Accrued Liabilities are assumed to be included in Accounts Payable to simplify the discussion.
15
Debt due for repayment in one year or less.
16
Capital Employed can also be defined as: CE = Total Assets – Current Liabilities + Short-Term Debt.
17
An ROCE of this magnitude produced on a consistent basis would be attractive to many investors.
18
The reader can check the result of Equation [1-34] by entering the appropriate values for EBITDA, D&A, NetInt, TR, and CE from Tables 1-1 and 1-3.
19
It's important to note that when calculating the Working Capital for a company from its Balance Sheet “Cash” is included. When it comes to the Cash Flow Statements the Changes in Working Capital do not include cash because one of the objectives of the Cash Flow Statement is to show the impact that changes in Working Capital have on “Cash.”
20
Similarly, if prior and current year Accounts Receivable balances were the same, this would mean that Cash collections equaled Revenues during the year and the impact Accounts Receivable had on Cash would be neutral.
21
The discounted cash flow method (explained in detail later in this book) is one of the most widely used methods for valuing a business and considered by many to be the theoretically correct methodology.
22
Of the three financial statements, the Cash Flow Statement can be the most difficult to understand. Considerable time is spent in Chapter 10 on preparing financial statements for a company and explaining the concepts that have been covered here and subsequent chapters in more detail.
23
Table 1-6 is actually known as the “Cash Flow Proof” and usually appended to Cash Flow Statements as will be shown in Chapter 10.
24
T. E. Copeland, T. Koller, and J. Murrin, Valuation: Measuring and Managing the Value of Companies, 2nd ed. (New York: John Wiley & Sons, 1995), 166, “ROIC Tree.”
25
It can actually get a little more complicated. If the company in question has interest-bearing cash or investments, the associated interest income would give the Required Revenue some assistance and actually reduce the Revenue required to support a given level of Net Income.
26
The reader may wish to refer to the “Takeaways” section at the beginning of this chapter before proceeding to the next chapter.
27
She wasn't able to do the Cash Flow Statement for the Prior
structure. Stated simply, they have to deal with the hand that has been dealt and improve it over time and provide sound proposals for financing growth.