View
929
Download
1
Category
Tags:
Preview:
Citation preview
3M Confidential
Cash Flow & Long Term Financial Metrics
Nicholas Salmanowicz & Veronica Wittek, 3M
Agenda
Why cash flow is important
Statement of Cash Flows
Free Cash Flow (FCF) and FCF Conversion
Long Term Financial Metrics
Definition: Cash Flow
A revenue or expense stream that changes a cash account over a given period. Cash inflows usually arise from one of three activities - financing, operations or investing - although this also occurs as a result of donations or gifts in the case of personal finance. Cash outflows result from expenses or investments.
Why cash flow is important
Managing cash flows helps ensure long-term viability
Ensures liquidity exists when times get tough Allows for the freedom to make investment decisions
that will benefit the company
Companies can show increases in earnings not related to cash
“All we care about is how much cash a business is likely to produce between now and judgment day”
-Warren Buffet
Income Statement Versus Cash Flow
Differences can include: Cash received for
sales vs. AR balance
Expenses paid vs. AP balance
Accruals Depreciation
Revenue 1,000
Expenses 750
Operating Income 250
September Income Statement
Revenue 800
Actual Cash Expenses 375
Operating Income 425
September Cash Impact
Market Comments – Cash Management is Valued “We expect cash generation to be a key driver of …
performance among the best-in-class industrials.” Goldman Sachs
The flight to quality mindset that caused banks’ flight to cash has also translated into the equity world as a demand increases for companies with proven cash flows Credit Suisse
… companies with strong balance sheets, free cash flow, and trustworthy management will do much better in this market. Integrity as a whole will be a commodity in the coming years as distrust in the system permeates. Market Watch
“Four of the top five fund managers list strong cash flows and clean balance sheets among the most important stock investment criteria” Fortune
Cash Remains KingCash Remains King
Why cash flow is important
Agenda
Why cash flow is important
Statement of Cash Flows
Free Cash Flow (FCF) and FCF Conversion
Long Term Financial Metrics
Statement of Cash Flows
Three Sections
1. Operating activities
2. Investing activities
3. Financing activities
Purpose – Cash in, Cash out
Operating Activities
Two methods of reporting Operating Section
1. Direct• Shows actual cash disbursements and receipts• Only used by 3% of companies
2. Indirect• Net Income is adjusted for cash and non-cash
transactions (Accruals, Deferrals, Depreciation/Amortization)
• Most common approach among larger businesses
Operating Activities
Cash generated by normal business operations Changes in inventory, accounts payable,
accounts receivable balances Impact of depreciation Impact of prepaid or deferred expenses
Category Balance Sheet Change Cash Flow Impact
Asset
Asset
Liability
Liability
Operating Activities
Asset/Liability change referenceCash from operations
Investing Cash Flows: Purchases and sales of fixed assets
and software Cash activity from selling or acquiring
business Cash used or received from the sale or
purchase of investments or marketable securities
Financing Cash Flows: Cash activity from borrowing or
retiring debt
Investing & Financing Activities
Company ABCConsolidated Statement of Cash Flows
2011 2012 ChangeCash Flows from Operating ActivitiesIncrease/(Decrease) in Net Assets (1,920) 345 2,265
Adjustements to reconcile change in Net AssetsDepreciation 86 77 (9) (Increase)/Decrease in contracts and grant receivables 1,194 (1,901) (3,095) (Increase)/Decrease in prepaid expenses (5) 0 6 (Increase)/Decrease in deferred assets 35 - (35) Increase/(Decrease) in account payable and accrued expenses 92 2,079 1,987 Net Cash flows provided by Operating Activities (518) 599 1,118
Cash Flows from Investing ActivitiesFixed Asset purchases (14) (3) 11 Net Cash flows provided/(used) by investing activities (14) (3) 11
Cash flows from financing activitiesNet cash flows provided/(used) by financing activities (751) (321) 430
Net Change in cash and equivalentsNet Increase/(Decrease) in cash (1,283) 596 1,880 Cash and equivalents, beginning of fiscal year 2,148 1,530 (618)
Cash and equivalents, end of fiscal year 865 2,126 1,261
Agenda
Why cash flow is important
Statement of Cash Flows
Free Cash Flow (FCF) and FCF Conversion
Long Term Financial Metrics
Free Cash Flow
• Cash From Operations Is Not EnoughFails to account for the cash a company must spend to replace its capital investments as they depreciate
• Free Cash Flow is the remaining funds after paying out all operating expenses and replenishing factories/equipment/etc. as they wear out
Strong Free Cash Flow Provides Opportunities
Strong Free Cash Flow: Essential to Strategy & Future Opportunities
Free Cash Flow
Retirement Benefits
Additional Contributions
Net Debt & InvestmentsSpecial Projects
Maintenance
Free Cash Flow
Ways to improve cash flow Improve Operating Income
• Create efficiencies/ eliminate Low Value added tasks• Ensure over the long term Revenues grow at a faster
rate than costs. (Effective Cost control).
Reduce Operating Capital Costs• Use equipment and machinery more effectively• Eliminate unnecessary assets
Reduce working capital• Reduce inventories where appropriate while still
meeting customer needs• Reduce customer terms where appropriate to
accelerate receivables• Negotiate longer payable terms where appropriate
Key Takeaways
Agenda
Why cash flow is important
Statement of Cash Flows
Free Cash Flow (FCF) and FCF Conversion
Long Term Financial Metrics
Long Term Financial Metrics
Every company, for profit and not for profit, has a mission, vision and overall strategies
How do you measure your success on these strategies?
Financial metrics and tools help you determine whether or not you are reaching your goals and strategies
Long Term Financial Metrics are tools to help you assess the status of your overall strategies
This can be done on a quarterly basis or annual basis
Comparing to other companies in your industry
Long Term Financial Metrics: Examples Tracking Event Increases/Revenue Growth ROI/ROA Expenses to Revenue – should be ~1x or less Asset Use
AR Turns: Sales/AR Days Sales Receivable: 365/Receivable Turnover
Short Term Current Ratio: (Current Assets/Current Liab)
Long Term Cash Coverage: (EBIT + Depreciation)/Interest
# of months cash on hand Surplus/Deficit as a % expenses
Thank you!
Recommended