Chapter 7 Funds Analysis, Cash Flow Analysis, and Financial
PlanningIntroduction: Cash flow and financial distress•In China, most ST firms get into
financial distress. If they could not get financial help soon they will not stand of feet
•But why does they get themselves in such a hell ? They have got much money with IPO.
草原兴发谎言致命 海市蜃楼崩塌•公司募集和借贷的 30 多亿现金，大部分不知所踪
•40 天前，因涉嫌违反有关证券法规，中国证监会调查组正式进驻了这家公司。
•事发于数月前草原兴发的一则“坦白”公告。今年 5 月 18 日，草原兴发发布了一则提示性公
告，公告表明，2005 年前三季度，公司在赊销业务发生时提前确认了销售收入 3.39 亿元，
相应虚增了银行存款，并制造了虚假的银行凭证。
•数年来，草原兴发大张旗鼓地宣布，动用
了 10 亿元收购了大批草原，但是公司一位中层却很无奈地告诉记者“我也不知道这些草地的
具体位置。”还有那 12 家食品厂，草原兴发曾花掉了 2.61 亿元真金白银，却没产生任何收
益。
•另有确凿证据表明，草原兴发在运用公司资金炒作股票，2001 年时曾有数亿资金在股市中
游走。Study Objectives•Flow of funds statement
•Accounting statement of cash flows
•Cash-flow forecasting
•Range of cash-flow estimates
•Forecasting financial statements1.Flow of funds statements•Flow of funds statement is a
summary of a firm’s changes in financial position from one period to another
•WHY do we need a flow of funds statement?
–By arranging a company’s flow of funds in a systematic fashion, the analyst can better
determine whether the decisions made for the firm resulted in a reasonable flows of funds or in
questionable flows, which warrant future inspection
(1)What is funds?•Funds: all of the firm’s investments and claims
•We define funds as the claims and investments because many important transactions are not
reported in cash
(2)What does flow of funds tell us?•The sources and uses of funds during a period of time
•The firm’s flow of funds is therefore comprised of the individual changes in balance sheet items
between two points in time
•The flow of funds statement portrays net rather than gross changes, although an analysis of the
gross funds flow of a firm over time would be much more revealing than analysis of net funds
flow, we are usually constrained by the financial information available
What are source? Uses?•Sources of funds: any decrease in an asset item or any increase in an
claim item
•Uses of funds: any increase in an asset item or any decrease in a claim item
•See Table 7-1 the determination of sources and uses
Adjustments•In the former computation, the change in fixed assets and retained earnings is a
mixed result of changes, and what we want is detailed information of changes in these items
•See computation: page 175
Implications of funds of statement analysis•Imbalances in the use of funds can be detected and
appropriate actions undertaken
•An analysis of the major sources of funds in the past reveals what portions of the firm’s growth
were financed internally and externally
•We can judge whether the firm has expanded at too fast a rate and whether the firm’s financing
capability is strained
Accounting statement of cash flow•Statement of cash flow is a summary of a firm’s cash
receipts and cash payments during a period of time
•The purpose of the statement of cash flow is to report a firm’s cash inflows and outflows, during
a period of time, segregated into three categories: operating, investing, and financing activities
The usefulness of statement of cash flow•It helps the financial manager to assess and identify:
–A company’s ability to generate future net cash inflows from operations to pay debts, interest,
and dividends
–A company’s need for external financing
–The reasons for differences between net income and net cash flow from operating activities
–The effects of cash and noncash investing and financing transactions
Contents of the statement•The statement of cash flows explains changes in cash (and cash
equivalents) by listing the activities that increased cash and those decreased cash
•Each activity’s cash inflow or outflow is segregated according to one of three broad category
types: operating, investing, or financing activity
•Table 7-4 (page 178) lists the activities found most often in a typical statement of cash flows
Alternative forms of the statement•The cash flow statement may be presented using either a
“direct” method or an “indirect” method. The only difference between the direct and indirect
methods of presentation concerns the reporting of operating activities; the investing and financing
activity sections would be identical under either method
Analyzing the statement of cash flow•Operating cash inflow, dividend and investment outflow
•Sales revenue inflow, inventory and employee wages outflow
•Analyzing of Aldine: page 180
Cash-flow forecasting(1)Cash budget: a forecast of a firm’s future cash flows arising from
collections and disbursements, usually on a monthly basis
–Cash flow reveals the timing and amount of expected cash inflows and outflows over the period
studied.
•With this information, the financial manager is better able to determine the future cash needs of
the firm, plan for the financing of these needs, and exercise control over the cash and liquidity of
the firm.
–Without cash budget, the firm may run into financial difficulty
(2) The preparation of cash budget•Sales forecast
•Collections and other cash receipts
•Cash disbursements
•Net cash flow and cash balance
•Means of meeting the cash deficits
The sales forecast•Often this is done by marketing department
•This forecast can be based on an internal analysis, an external one, or both.
•With an internal approach, sale representatives are asked to project sales for the forthcoming
period. The product sales managers screen these estimates and consolidate them into sales
estimates for product lines. The estimates for the various product lines are then combined into an
overall sales estimate for the firm.
•The basic problem with an internal approach is that it can be too myopic. Often, significant
trends in the economy and in the industry are overlooked
•With an external approach, economic analysts make forecasts of the economy and of industry
sales for several years to come. They may use regression analysis to estimate the association
between industry sales and economy in general. The next step is to estimate market share by
individual products, prices that are likely to prevail, and the expected reception of new product
•From this information, an external sales forecast can be prepared
•The defect of external approach is that the data used in the computation are not always very
accurate, most of them are estimated by scholars or experts who are not familiar with product
markets
•Past experience will show which of the two forecasts is likely to be more accurate
•In general, the external forecast should serve as a foundation for the final sales forecast, often
modified by internal forecast
Collections and other cash receipts•Collections here means to determine the cash receipts from
the sales
•For cash sales, cash is received at the time of the sale; for credit sales, the receipts comes later.
How much later depends on the billing terms, the type of customer, and the credit and collection
policies of the firm
•Example: Table 7-7, page 183
Cash receipts•Cash receipts may arise from the sale of assets, as well as from external financing
and investment income. These cash receipts need estimations or advanced planning
Cash disbursements•Operation disbursements and other disbursements
•Operation disbursements are expenses occurred to maintain operation, such as material, wages,
power, interest, tax, etc.
•How does the firm estimate Operation disbursements ?
•Sales---production schedules---material purchasing, labor cost, and other expenses
•Example: Table 7-8 page 184
Other disbursements•Capital expenditures: the expenditures involves long-term investment. They
are planned in advance, so they are predictable for the short-term cash budget
•Dividend payments for most companies are stable and are paid on specific date
•Federal taxes can be estimated according to the firm’s sales and income
Net cash flow and cash balance•After having taken all foreseeable cash inflows and outflows into
account, we combine the cash receipts and disbursements, and compute the projected cash
position by month
•If, in a month there is a cash deficit, the financial manager should take measures to meet this
deficit. The feasible measures may including borrowing from bank or delaying capital
expenditures or payments for purchases
Example
•The cash manager of Monet Paint are preparing a cash budget for the 6 months from April
through September. Their cash management model is based on the following assumptions:
•Recent and forecasted sales are:
Month
Sales
forecast
2(actual)
$400000
3(actual)
4(forecast)
•Twenty percent of sales are collected in the month of sale, 50% are collected in the month
following the sale, and 30% are collected in the second month following the sale
•Purchases are 60% of sales, and purchases are paid for 1 month prior to sale
•Wages and salaries are 12% of sales and are paid in the same month as the sale
•Rent of $10000 is paid each month. Additional cash operating expense of $30000 per month will
be incurred for April through July. These will decrease to $25000 for August and September
•Tax payments of $ 20000 and $30000 are expected in April and July, respectively. A capital
expenditure of $150000 will occur in June, and the firm has a mortgage payment of $60000 due in
May
•The cash balance at the end of March is $150000. Managers want to maintains a minimum
balance of $100000 at all times. The firm will borrow what it needs to achieve the minimum
balance. Any cash above the minimum will be used to pay off any loan balance until it is
eliminated.
Cash receipts budget
month
sales
Collection(current) 20%
120000
140000
160000
160000
140000
120000
Previous month 50%
250000
300000
350000
400000
400000
350000
2nd month previous 30%
120000
150000
180000
210000
240000
240000
Total cash receipts
490000
590000
690000
770000
780000
710000
purchase
420000
480000
480000
420000
360000
300000
Wages and salaries
72000
84000
96000
96000
84000
72000
Rent
10000
10000
10000
10000
10000
10000
Cash operating expense
30000
30000
30000
30000
25000
25000
Tax installments
20000
Cash disbursement budget
month
30000
Capital expenditures
150000
Mortgage payment
Total cash disbursement
60000
552000
664000
766000
586000
479000
407000
Cash balance and deficits meetings
month
Net cash flow
-62000
-74000
-76000
184000
301000
303000
Beginning cash balance
150000
100000
100000
100000
122000
423000
Available balance
88000
26000
24000
284000
423000
726000
Monthly borrowing
12000
74000
76000
423000
726000
Monthly repayment
162000
Ending balance
100000
100000
100000
Cumulative loan balance
12000
86000
162000
122000
4. Range of cash flow estimates•Depending on the care devoted to preparing the budget and the
volatility of cash flows resulting from the nature of the business, actual cash flows will deviate
more or less widely from those that are expected.
•In the face of uncertainty, we must provide information about the range of possible outcomes
Deviations from expected cash flows•To take into account deviations from expected cash flows, it
is desirable to work out additional cash budget
–We can change assumptions of cash flow and display new cash budget. For example, different
sales volume, price, etc.
–See figure 7-1, distributions of ending cash balances
Use of probabilistic information•The expected cash position plus the distribution of possible
outcomes give us a considerable amount of information
–additional funds required or the funds released under various possible outcomes
–the firm’s ability to adjust to deviations from the expected outcomes
•From the standpoint of internal planning, it is far better to allow for a range of possible outcomes
than to rely solely on the expected outcome
5.Forecasting financial statements•Forecast financial statements are expected financial
statements based on conditions that management expects to exist and actions it expects to take
•A cash budget gives us information about only the prospective future cash positions of the firm,
whereas forecast statements embody expected estimates of all assets and liabilities as well as of
income statement items
•Much of the information that goes into the preparation of the cash budget can be used to derive a
forecast income statement
•Sales revenue: sales forecast
•Assume cost can be divided into fixed cost and variable cost
•Cost of goods sold: assume variable cost
•Selling, general and administrative expense: assume fixed cost
•Income tax: according to tax law
•Dividend: according to dividend policy
•Forecast asset: assume fixed turnover ratios for receivables and inventories
•Future net fixed assets are estimated by adding planned expenditures to existing net fixed assets
and substracting from this sum the book value of any fixed assets sold along with depreciations
during the period
•Forecasting liabilities: accounts payable according to purchase and payments amounts; wages
according to production schedule; shareholders’ equity according to net profit less dividend
•Example: page 189-191