Cash Flow Module
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Calculates and distributes cash generated by firm
Excess cash: When liabilities exceed assets
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Either increase assets
Decrease liabilities
Another way to balance the model
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Adjust left side of balance sheet
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Adjust right side of balance sheet
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(Cash, Marketable Securities)
Pay dividend in excess of minimum
Decrease retained earnings
Link between income statement and balance sheet
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Cash flow module
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Start with operating cash flow
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Adjust for all changes in balance sheet items
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NI + Depreciation
Redundancy (fail safe) system
Picks up changes in financing
End result
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Cash Available for Dividends
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Sometimes will equal NI*payout
Can be more (residual)
Feeds to Dividends line in Income Statement
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Representative Equations
Cash flow sector, cont.
C.1 Earnings Cash Flowt  Net incomet  Depreciation Expenset
C.2 NWC Investmentt  Other CA Investmentt  Spontaneous Financingt
C.3 Cash Flow from Operationst  Earnings Cash Flowt  NWC Investmentt
C.4 Capital Expenditurest  Fixed Asset Investmentt
C.5 Capital Financingt   Debtt  Debtt 1    Common Stockt  Common Stockt 1 
C.6 Net Cash Inflowt  Cash Flow from Operationst  Capital Expenditurest
 Capital Financingt
 Cash 
C.7 Increase in Casht  
 * Salest  Casht 1
 Sales 
C.8 Cash Available for Dividend t  Net Cash Inflowt  Increase in Casht
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Cash must flow somewhere
Not into a financial black hole
 Above equations direct specified amount
to Cash Balance
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Residual directed to dividends
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Could have gone into Marketable Securities or
used to retire debt
The key
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Residual flow must be directed somewhere
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A financial black hole
Net Cash Inflow
Addition to Cash Balance
Dividend
Excess Cash Flow
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1000
300 (X% of Sales)
500 (Y% of Net Income)
200
The $200 must be directed somewhere
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Marketable securities (or cash)
Larger Dividend
Retire debt
Repurchase stock
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Equilibrium
Two ways to achieve
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Equilibrate stock balances (adjust right side)
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Balance flow of funds (adjust left side)
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Financing Module
Total Assetst = Total Liabilitiest
Total Assetst = Total Liabilitiest-1 + New Financingt
Cash Flow Module
Total Uses of Fundst = Total Sourcest
Net Change in Cash Balancet = Net Cash Inflowt
Either or both methods can be used
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Use elements of both for checks
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Model must be told how to
balance
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Simulation model
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Can
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Cannot
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Determine how much new financing is necessary
Make decisions
User specifies plug
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Force equality between sources and uses of cash
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Adjust cash balance
“Cash-balancing” model
OR
 Force equality between assets and liabilities
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Adjust debt and common stock balances
“Stock-balancing” model
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Equilibrium
Example: Stock balancing
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Investment module
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Calculates additional investment in fixed assets of $100
million
Financing module
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$25 million to come from spontaneous and internal sources
Left-hand side exceeds right-hand side of balance sheet
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Assets exceed liabilities and stockholders' equity by $75 million
Difference: the amount necessary to balance
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Required External Financing
The plug
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$75 million
User determines the source
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Debt or equity
Forces the model into balance
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Equilibrium
Example: Flow balancing
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Investment module
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Calculates additional investment in fixed assets of $100 million
Financing module
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$125 million to come from spontaneous and internal sources
Right-hand side exceeds left-hand side of balance sheet
Difference: the amount necessary to balance
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Excess cash
The plug
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$25 million
User determines the allocation
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Increase cash or marketable securities
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Increase dividend
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Increases assets
Decreases liabilities (retained earnings)
Decrease debt
Buyback shares
Forces the model into balance
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Perverse Effects
Dividends: Problems
Paying dividends without sufficient cash
flow
 Paying negative dividend when firm
experiences a loss
 Distributing excess cash
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Perverse Effects
Dividends: Solutions
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Calculate Minimum Dividend in Financing
Module
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Assures dividend will be financed
Prevent from going negative when NI < 0
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Calculate Cash Available for Dividends in
Cash Flow Sector
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Use =MAX(.)
Includes external financing for minimum dividend
Reference CAfD in income statement
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Perverse Effects
Dividends: Excel code
Minimum Dividend (from Financing Module)
 MAX  Net Incomet * Payout Ratio, 0 
Income sector code for Dividends (redundant code)
 IF  CAfDt  NI t * Payout , MAX  CAfDt , 0  , MAX  NI t * Payout , 0  
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Four equilibrium checks
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Balance Sheet
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Total Assets less Total Liabilities and Shareholder Equity
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Have all the financing needs been met?
Must equal 0
Cash Flow module
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Net Cash Flow less Increase in Cash less Dividends
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Is all free cash flow allocated?
Must equal 0
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Statement of Cash Flows
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Net increase in cash less uses of cash
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Else some cash is flowing into a financial black hole
Does what’s left after all uses for cash equal net increase in cash?
Must equal 0
Master check
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Sum of the three above
Must equal 0
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