CORPORATE CASH FLOW

CH-403 Process Economics and Plant Design

Business Planning
 Strategic planning involves setting goals, objectives
and broad business plans for 5-10 years time
period in the future
 Tactical planning involves the detailing of strategic
plan for 2-5 years
 Capital budgeting involves a request, analysis and
approval of expenditures for the coming year.
Business Plan
 Perceived goals and objectives of the company
 Market data: projected share of market, market prices, market growth, market
the company serves, Competition (domestic and global), project and/or product
life
 Capital requirements: Fixed capital investment, working capital, other capital
requirements
 Operating Expenses: Manufacturing expenses, Sales expenses, General
overhead expenses
 Profitability: Profit after taxes, cash flow, payout period, rate of return, return
on equity and assets, Economic value added
 Projected risk: Effect of changes in revenue, Effect of changes in direct and
indirect expenses, Effect of cost of capital, Effect of potential changes in market
competition
 Project life: Estimated life cycle of the product or venture
Source of Funds
 Internal Sources
 Reserves if any
 Retained earnings: (after-tax earnings – dividends)
 External Sources
 Debt
 Stockholders’ Equity
 Preferred
stock
 Common stock
Source of Funds: Debt
 Current Debt: maturing up to 1 year for urgent
short term need such as raw material purchase
 Bank can give commercial loan
 Open market line of credit in the form of commercial
paper
 Open market paper or banker’s acceptance: draft from
own bank to the vendor
Source of Funds: Debt
 Intermediate Debt: repayment within 1-10 years
 Deferred payment contract: borrower in contract with
lender such as bank, insurance company or
institutional investor to repay scheduled payments
over a period of time such as 5-10 years
 Revolving credit: Lender agrees to loan an amount for
a specified time period and have commission paid.
 Term loans: equal installments in a time period as long
as 10 years.
Source of Funds: Debt
 Long-term Debt: Bonds or long term notes issued at
par values. They are securities promising to pay a
certain amount of interest every 6 months for a
number of years until the bond matures.
 Mortgage bonds: backed by specific pledged assets
 Debenture bonds: secured by earning potential of the
company
 Income bonds: pay interest charges for a certain period
 Convertible bonds: bonds can be converted to stocks
Source of Funds: Equity
 Preferred stock
 These stocks in the company get guaranteed dividends
 A dividend is a payment made by a corporation to its shareholders,
usually as a distribution of profits. When a corporation earns a profit
or surplus, it can either re-invest it in the business (called 
retained earnings), or it can distribute it to shareholders
 When company can not pay dividends, it accrues to later years when
profits are realized
 The stockholders have no say in company matters
 Common stock
 Dividends after preferred stockholders are paid
 The stockholders have a say in company meetings
Corporate Cash Flow
Cumulative Cash Position
Relationship between terms
 Revenue = total income (sj)
 Profit = Revenue (sj) – cash expenses (cj)
 Gross profit = Profit – depreciation (dj)
 Income tax = Gross profit x tax rate (φ)
 Net profit after tax (Np,j)= (sj – cj – dj)(1-φ)
 Net cash flow = Net profit after tax + Depreciation + recovery = (sj – cj –
dj)( 1-φ) + dj + rj

 in accountancy, depreciation refers to two aspects of the same concept:

1. the decrease in value of assets (fair value depreciation), and
2. the allocation of the cost of assets to periods in which the assets are
used (depreciation with the matching principle).
References
 Peters, M. S., Timmerhaus, K. and West, R. E., Plant
Design and Economics for Chemical Engineers,
McGraw Hill Education, 5th Edition, 2002.
 Couper, J. R., Process Engineering Economics, CRC
Press, 1st Edition, 2003.