3. Cash
• Cash is considered cash and cheques
• It’s a liquid asset of the business
• Cash is the inflow of money into the business bank
account (actual money received, rather than what
is ‘promised’)
• Cash also flows out of the business – e.g. paying
suppliers bills.
• Not all bills are paid by cash – many are on credit
terms
4. Profit
• Profit — all the cash that’s fit to spend
• This is measured by taking the costs away from the
sales revenue
• It’s different from cash because profit is the money
earned by the business, and is represented on
paper (in the accounts)
• Because sales can be made on credit terms, not
just cash, then it’s different to cash flow
5. • — sometimes called “net income.” Profit is the
money that’s left over after everything — cost of
goods, salaries, taxes, rent, the dog food for your
office schnauzer, etc. — has been paid.
• Profit is what business owners get to play with when
all is said and done. Usually, this money ends up
being saved for future investments or given back to
people who own a stake in the business.
6. Cash flow
• is the money that is moving (flowing) in and out of
your business in a month. Here is how cash flow
works:
• Cash is coming in from customers or clients who are
buying your products or services. If customers don't
pay at time of purchase, some of your cash flow is
coming from collections of accounts receivable.
7. • Cash is going out of your business in the form of
payments for expenses, like rent or a mortgage, in
monthly loan payments, and in payments for taxes
and other accounts Legislation of Russia On-line
Database
8. • Think of 'cash flow' as a picture of your checking
account. If more money is coming in than is going
out, you are in a "positive cash flow" situation and
you have enough to pay your bills. If more cash is
going out than coming in, you are in danger of
being overdrawn, and you will need to find money
to cover your overdrafts. This is why new businesses
typically need working capital, in the form of a loan
or line of credit, to cover shortages in cash flow.
9. Cash Flow Analysis
• An objective of financial analysis is to
measure a company’s operating
performance and financial condition.
12. • The cash flow statement reflects the changes in the cash
positions of a company.
• As an investor it is important to check cash flow from
operations, financing and investing activities.
• The cash flow statement is important as even profitable
companies can fail to adequately manage their cash
flow.
• It is often said profit is an opinion while cash flow is a
fact. A profit of $X on a company's income statement
does not mean that $X has been added to its bank
balance, however a cash inflow of $X on the cash flow
statement means that the company has added exactly
$X to its bank account.
13. Cash flow analysis
• The choices available in the accrual accounting system
make it difficult to compare companies' performances.
• Cash flows provide the financial analyst with a way of
transforming net income based on an accrual system for
it to be compared easier.
14. Difficulties with
measuring cash flows
• The primary difficulty with measuring cash
flow is that it is a flow: Cash flows into the
company (cash inflows) and cash flow
out of the company (cash outflows).
15. Difficulties with
measuring cash flows
• A simple method of calculating cash flow
requires adding noncash expenses (for
example, depreciation) to the reported net
income amount to arrive at an approximation
of cash flow, earning before depreciation and
amortization, or EBDA.
EBDA = net income + Depreciation and
amortization
16. Difficulties with
measuring cash flows
• The problem with this measure is that it
ignores the many other sources and uses
of cash during the period, cash that, for
many companies, are significant.
17. Difficulties with
measuring cash flows
• Another estimate of cash flow that is simple to
calculate is earnings before interest, taxes,
depreciation, and amortization, EBITDA.
• It is calculated:
EBITDA = Operating income, EBIT + interest
expenses + depreciation and amortization
18. Difficulties with
measuring cash flows
• EBITDA is useful not only for its simplicity,
but because it allows us to compare
companies based on operations, without
considering how companies choose to
finance their assets.
19. The usefulness of cash
flows in financial analysis
An analysis of cash flows, and the sources of cash
flows can reveal information to the analyst, including:
o The sources of financing the company’s capital spending.
o The company’s dependence on borrowing.
o The quality of earnings.
20. Ratio Analysis
• This ratio gives the analyst information about the
financial flexibility of the company and is particulary
useful for capital- intensive firms and utilities
• This ratio gives a measure of a company’s ability to meet
maturing debt obligations.
An objective of financial analysis is to assess a company’s operating performance and financial condition. The information that an analyst has available includes economic, market, and financial information.
Some of the important financial data is provided by the company in it’s annual and quarterly financial statements.
However, the choices available in the accrual accounting system make it difficult to compare companies' performances.
Cash flows provide the financial analyst with a way of transforming net income based on an accrual system to a more comparable medium.
The primary difficulty with measuring cash flow is that it is a flow: Cash flows into the company (cash inflows) and cash flow out of the company (cash outflows).
At any point in time there is a stock of cash on hand, but the stock of cash on hand varies among companies because of the size of the company, the cash demands of the business, and a company’s management of working capital.
A simple method of calculating cash flow requires adding noncash expenses (for example, depreciation) to the reported net income amount to arrive at an approximation of cash flow, earning before depreciation and amortization, or EBDA.
EBDA = net income + Depreciation and amortization
The problem with this measure is that it ignores the many other sources and uses of cash during the period, cash that, for many companies, are significant.
Another estimate of cash flow that is simple to calculate is earnings before interest, taxes, depreciation, and amortization, EBITDA.
It is calculated:
EBITDA = Operating income, EBIT + interest expenses + depreciation and amortization
EBITDA is useful not only for its simplicity, but because it allows us to compare companies based on operations, without considering how companies choose to finance their assets.
