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Small Business Credit: Analyzing Cash Flows: Cash from Operations

Cash from operations

Cash Flow Summary

Jasmine and Co.

  

2010

Operating expenses (less non-cash expenses)

-8,500

? Prepaid expenses

100

? Accrued expenses

200

Cash paid for operating costs

-8,200

Cash after operations

15,400

Figure 6: Extract Cash flow Summary- Cash after operations

In the third segment we consider all the expenses for which Jasmine & Co. has paid cash, i.e. we will exclude all the non cash expenses like depreciation, bad debts, etc. Interest expense is considered in a later segment. From the income statement for 2010 we see that the total operating expenses for the year, excluding depreciation, were $8,500. We will add back the decrease in prepayments of $100 and the increase in accruals of $200. The result is the cash paid for operating costs of $8,200.

Subtracting this amount from our running balance of $ $23,600 above gives us a figure for cash after operations of $15,400.

Cash flow analysis

Quantitative analysis

  • Operating expenses as a percentage of sales:
    • This is calculated as (Operating expenses/Sales) x 100.

      The operating expenses (expressed as a % of sales) declined from 28% in 2009 to 23% in 2010. This is a significant decrease but the reduction is understandable as most of Jasmine & Co.’s expenses are fixed in nature, i.e. they tend not to vary with changes in sales levels.

Quantitative analysis

The bank will evaluate what changes in industry and business conditions and management actions have impacted the company so as to bring about the change in the operating expenses.

Net cash after operations

Cash Flow Summary

Jasmine and Co.

  

2010

Other income (expenses)

0

? Other current and non-current assets

2000

Tax

-1,600

? Deferred Tax

0

? Tax payable

-200

Tax paid and other income/expense

200

Net cash after operations

15,600

Figure 7: Extract Cash flow Summary- Net cash after operations

All other income and expenses (like profit on disposal of asset, etc.), changes in other assets and changes in tax are considered in this segment. From the balance sheet we can see that there was a decrease in other current assets of $2,000. This decrease is added in the cash flow summary. Tax in 2010 was $1,600 and tax payable in the balance sheet decreased by $200; these two entries are subtracted in the cash flow summary. The net effect of these elements is an increase in cash due to tax paid and other income/ expense of $200, which is added to the running balance of the cash flow summary. This results in net cash after operations of $15,600.

The analysis on the other 4 segments will not be as detailed as above because most of the expense and income items that fall in them are not usually in the control of the business. For example, an increase in the tax rate that increases the tax paid by business cannot be controlled by the business.

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