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Cashflow

Provides a detailed analysis of how a company manages its cash.

Cash flow projections are only as valuable as the processes to qualify and quantify the stories the contribute to them are accurate.

Definition​

Free cash flow = Net cash from operating activities - Capital expenditures

Purpose​

Crucial for understanding the liquidity and overall financial health of a business.

  • Prove benefit when closing complex sales
  • Justification of capital expenditure
  • Budgeting and resource planning
  • Product roadmap prioritisation

Components​

  • Operating Activities: Cash generated or spent in the core business operations. It includes revenues from selling goods and services, payments to suppliers and employees, and other expenses directly related to the core business activities.
  • Investing Activities: Cash used in or obtained from investment-related activities. It includes the purchase or sale of long-term assets like equipment, property, or investment securities.
  • Financing Activities: Cash flows related to financing the business. It includes activities like issuing or buying back shares, borrowing, or repaying debts, and paying dividends.

Requirements​

Future Bets​

The bottom line of a cash flow statement shows the net increase or decrease in cash for the period, providing an essential tool for investors, creditors, and company management to gauge the financial viability and operational efficiency of a business.

Understanding the cash flow statement is crucial for making informed investment or management decisions.

Interpretation​

This not only involves analysing numbers but also understanding

  • the business context
  • industry dynamics
  • broader economic environment

Create a standard process to evaluate value proposition inputs

  • Credibility of domain experts?
  • What is the riskiest assumption?
  • Do you believe the expectations?
  • What is the minimal bet to test the path?

Analytical Review​

Consistency with Previous Periods

  • Have there been significant changes in cash flow patterns compared to previous periods?
  • Are these changes explainable by known events or business developments?

Alignment with Other Financial Statements

  • Does the cash flow from operations align with the company’s net income and changes in working capital on the balance sheet?
  • Are investing and financing activities reflected consistently in the balance sheet and income statement?

Industry Comparison

  • How does the company's cash flow compare to industry norms or key competitors?
  • Are there any unusual trends or figures that stand out when compared to industry standards?

Detailed Examination​

Operating Activities Analysis

  • Is the cash generated from operating activities sufficient to sustain the business operations?
  • Are there any anomalies in receivables, payables, or inventory that significantly affect cash from operations?

Investing Activities Scrutiny

  • Are the cash flows from investing activities consistent with the company's long-term asset acquisition or disposal strategies?
  • Are there large, unexplained expenditures or receipts?

Financing Activities Investigation

  • How does the company manage its debt and equity financing?
  • Are there large or unusual financing transactions that need further explanation?

Supplementary Checks​

Notes to Financial Statements

  • Do the notes provide adequate explanation for significant transactions and balances affecting cash flow?
  • Are there any inconsistencies between the notes and the cash flow statement?

Audit Report Review

  • What is the opinion of the external auditors on the financial statements?
  • Are there any qualifications or concerns raised by the auditors?

Management Discussion and Analysis (MD&A)

  • Does the MD&A offer insights into the cash flow trends and figures?
  • Are there explanations for significant variances or unusual items?

External Validation​

Market and Economic Factors

  • Are there external economic or market conditions that could have impacted the cash flows?
  • How well has the company adapted to these external challenges or opportunities?

Regulatory Compliance

  • Is the company compliant with financial reporting standards and regulations?
  • Have there been any regulatory issues or penalties related to financial reporting?

Comparison with Forecasts and Budgets

How do actual cash flows compare with previously issued forecasts or budgets? Are there explanations for significant deviations?

Final Assessment​

Overall Financial Health

  • What does the cash flow statement indicate about the company's liquidity, solvency, and financial stability?
  • Are there signs of potential cash flow problems in the future?

Internal Controls and Procedures

  • Does the company have robust internal controls and procedures for financial reporting?
  • Are there any reported weaknesses or failures in internal controls?

Context​