FINANCE

Cash flows + financial planning

Solvay Business School

Université Libre de Bruxelles
Fall 2006
 Sources of Cash Inflow and Cash Outflow

Operating Activities Investing Activities Financing Activities

Sales of goods and services Sale of fixed assets Issuance of stocks and bonds
Sales of LT financial assets LT and ST borrowing

ΔCASH

Operating Activities Investing Activities Financing Activities

Purchase of supplies Capital expenditures and Repurchage of stocks and bonds
Selling, general and acquisitions Repayment of debt
administrative expenses LT financial investments Dividend payment
Tax expenses

CF from operating CF from investing CF from financing

activities activities activities

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 Exemple numérique

COMPTE DE RESULTATS T+1

Chiffre d'affaires 100.0
Excédent brut d'exploitation 50.0
Amortissements 10.0
Résultat d'exploitation 40.0
Impôts 13.6
Bénéfice 26.4
Dividendes 10.56

BILAN T T+1 Δ
Immobilisés nets 100.0 115.0 15.0
Clients 12.0 32.0 20.0
Stocks 15.0 30.0 15.0
Disponible 20.0 7.8 -12.2
147.0 184.8 37.8

Fonds propres 132.0 147.8 15.8

Dette financière 0.0 15.0 15.0
Fournisseurs 15.0 22.0 7.0
147.0 184.8 37.8

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 Cash flow opérationnel

Besoin de fonds de roulement

Working Capital Requirement
Comptabilité Cash flow Clients Stocks Fournisseurs
Account Inventory Account
receivable payable
Chiffre d'affaires 100.0 80.0 20.0
Revenue
Achats 65.0 -58.0 7.0
Variation de stocks 15.0 0.0 15.0
Amortissements 10.0 0.0
Depreciation
Résultat d'exploitation 40.0
Earnings before interest and taxes
Impôts 13.6 -13.6
Taxes
Bénéfice 26.4 20.0 15.0 7.0
Cash flow opérationnel 8.4

Bénéfice 26.4
Amortissements 10.0
-ΔBFR 28.0
=CFop 8.4

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 Tableau de financement

TABLEAU DE FINANCEMENT T+1

STATEMENT OF CASH FLOWS
Bénéfice 26.4
Amortissements 10.0
- Variation BFR 28.0
CASH FLOW OPERATIONNEL 8.4
Variation des immobilisés nets 15.0
Amortissements 10.0
CASH FLOW D'INVESTISSEMENT -25
FREE CASH FLOW -16.6
Dividendes -10.56
Variation du capital 0
Variation de la dette 15
CASH FLOW DU FINANCEMENT 4.44
VARIATION DU DISPONIBLE -12.2

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 Notations

• Income statement • Balance sheet

• REV Revenue • FA Fixed assets, net
• CGS Cost of goods sold • AR Accounts receivable
• SGA Selling, general and administrative • INV Inventories
expenses • CASH Cash & cash equivalents
• Dep Depreciation • SE Equity capital
• EBIT Earnings before interest and taxes • LTD Long term debt
• Int Interest expenses • AP Accounts payable
• TAX Taxes • STD Short-term borrowing
• Tc Tax rate
• NI Net income • Statement of retained income
• DIV Dividendes

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 Income statement and balance sheet

• Income statement
• EBIT = REV - CGS - SGA - Dep
• TAX = Tc (EBIT - Int)
• NI = EBIT - Int - TAX
• Balance sheet equation
• FA + AR + INV + CASH = SE + LTD + AP + STD
Working capital requirement: WCR  AR + INV - AP
=(Current assets - CASH) - (Current liabilities - STD)
Summarised balance sheet:
FA + WCR + CASH = SE + D (D = LTD + STD)

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 Cash flow statement : indirect method

FA + WCR + CASH = SE + D

FA = CAPEX - Dep

CAPEX = Acquisitions - Disposals (investing & divesting)
SE = NI - DIV + K
K = New issuance of capital

(NI + Dep - WCR) - (CAPEX) + (K + D -DIV) = CASH

Cash flow Cash flow Cash flow
from from from =
operating + investing +
financing
activities activities activities

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 Statement of cash flows: direct method

+ Cash collection from customers REV - AR

- Cash payment to suppliers and
employees CGS + INV + SGA - AP
- Cash paid for interest Int
- Cash paid for taxes TAX
= Cash flow from operating activities (REV-CGS-SGA-Int-TAX)- WCR
=NI+Dep-WCR

+ Cash flow from investing activities -CAPEX

+ Cash flow from financing activity K + D - DIV

= CASH
(NI + Dep - WCR) + (-CAPEX) + (K + D - DIV) =
CASH
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 Free Cash Flow

• Free Cash Flow = Cash flow from operating activities

+ Cash flow from investing activities

Free Cash Flow = DIV - K - D + Cash

• Calculating free cash flows of all equity firm:

Free Cash Flow = EBIT(1-TC) + Dep - WCR - CAPEX

• Statement of cash flows for all-equity firm:

Free Cash Flow = DIV - K + Cash

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 Financial Forecasting

EBITDA
Income -Depreciation
Statement =EBIT
-Taxes
+Net Income

Statement CF from operating activities

of CF from investing activities
Cash Flows CF from financing activities

Update
Balance
Sheet

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 Financial Planning

• Based on ∆Revenues
• Assumptions on key ratios relating Revenues to:
• Gross margin: m = EBITDA /Revenues
• Working capital requirement: w =  WCR /  Revenues
• Net fixed assets: a =  NFA /  Revenues
• Financial policy:
• Payout ratio p = DIV/Net Income
• Depreciation d = Depreciation / Fixed Assets-1
• Environment:
• Tax rate TC
• Cost of debt i

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 Data

• Revenues year 0: 2,000 Gross margin: m = 30%

WCR: w = 20%
• Growth rate year 1: 25%
Net fixed assets: a = 30%
• Balance sheet end year 0 Payout ratio p = 50%
Depreciation d = 10%
Net Fixed Assets 600 Tax rate TC = 40%
Cost of debt i = 10%
Working Capital Requirement 400
Cash 0
Total Assets 1,000
Book Equity 600
Debt (financial) 400
Total Liabilities + 1,000
Stockholders’ equity

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 Step 1: Income statement

Year 0 Year 1

Sales 2,000 2,500 Rev-1 (1+g)

EBITDA 750 m × Rev
Depreciation 60 d × NFA-1
EBIT 690
Interests 40 i × D-1

Taxes 260
Net Income 390

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 Step 2: Statement of Cash Flows

Year 0 Year 1
Net Income 390 From Income Stat.
Depreciation 60 From Income Stat.
∆WCR 100 w ×  Revenues
CF from operations 350
∆NFA 150 a ×  Revenues
Depreciation 60
CF from investing -210
Div 195 p × Net Income
Stock Issues/buy back 0 Assumption
∆Debt 55 Plug
CF from financing -140
∆Cash 0

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 Step 3: Update balance sheet

Year 0 Year 1

Net Fixed Assets 600 750 NFA-1 + Inv – Dep

Working Capital 400 500 WCR-1 +  WCR

Cash 0 0 Cash-1 +  Cash

1,000 1,250

Book Equity 600 795 BEq-1+SI + NI –

DIV
Debt 400 455 D-1 +  D

1,000 1,250

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 The Full Model
Year 0 Year 1 Year 2 Year 3 Year 4
Income Statement
Financial planning
Sales 2,000 2,500 3,125 3,906 4,883
Sales growth rate 25%
EBITDA 750 938 1,172 1,465
Gross margin 30%
Depreciation 60 75 94 117
Depreciation rate 10%
EBIT 690 863 1,078 1,348
Cost of debt 10% Interest Expenses 40 46 52 61
Tax rate 40% Taxes 260 327 410 515
Payout 50% Net Income 390 490 616 772
WC/Sales 20% Statement of Cash Flows
NFA/Sales 30% Earnings 390 490 616 772
Depreciation 60 75 94 117
Var WCR 100 125 156 195
Operating Cash Flow 350 440 553 694
Var Net Fixed Assets 150 188 234 293
Depreciation 60 75 94 117
Cash Flow from Invest -210 -263 -328 -410
Dividends 195 245 308 386
Var Book Equity 0 0 0 0
Var Debt 55 67 83 102
CF from Financing -140 -178 -225 -284
Var Cash 0 0 0 0
Balance Sheet
Fixed assets 600 750 938 1,172 1,465
Working Capital 400 500 625 781 977
Cash 0 0 0 0 0
1,000 1,250 1,563 1,953 2,441
Book Equity 600 795 1,040 1,348 1,734
Debt (Financial) 400 455 522 605 707
1,000 1,250 1,563 1,953 2,441

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