Cash flow summary and Cash flow analysis
The cash flows of a company are different from the profit or loss that we see in its income statement. A company may be making profits every year but it may still be cash strapped and facing liquidity problems. A bank needs to thoroughly review a potential borrower’s cash flows, as it is the cash generated by the company, and not the profits that it makes, which goes towards repaying the loan. In order to assess the company’s cash flows, the bank will prepare a cash flow summary. This summary presents the movements that occurred in cash during the year being assessed. The bank accompanies this summary with a quantitative and qualitative cash flow analysis.
Let us look at the layout of a sample cash flow summary.
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Cash Flow Summary |
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Wilson and Co. |
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|
2010 |
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Sales |
xxx |
|
? Accounts receivables |
xxx |
|
Cash collected from sales |
xxx |
|
Cost of inventory sold |
xxx |
|
? Inventory |
xxx |
|
? Accounts payables |
xxx |
|
Cash paid for production |
xxx |
|
Cash from trading activities |
xxx |
|
Operating expenses (less non-cash expenses) |
xxx |
|
? Prepaid expenses |
xxx |
|
? Accrued expenses |
xxx |
|
Cash paid for operating costs |
xxx |
|
Cash after operations |
xxx |
|
Other income (expenses) |
xxx |
|
? Other current and non-current assets |
xxx |
|
Tax |
xxx |
|
? Deferred Tax |
xxx |
|
? Tax payable |
xxx |
|
Tax paid and other income/expense |
xxx |
|
Net cash after operations |
xxx |
|
Interest expense |
xxx |
|
? Interest payable |
xxx |
|
Dividends declared |
xxx |
|
? Dividends payable |
xxx |
|
Cash paid for dividends and interest |
xxx |
|
Cash after financing costs |
xxx |
|
|
|
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Current portion long-term debt (prior year) |
xxx |
|
Cash after debt amortisation |
xxx |
|
|
|
|
? Fixed assets |
xxx |
|
? Intangibles |
xxx |
|
? Investments |
xxx |
|
Cash paid for fixed assets and investments |
xxx |
|
Financing surplus (requirement) |
xxx |
|
|
|
|
? Short-term debt |
xxx |
|
? Long-term debt |
xxx |
|
? Preference shares |
xxx |
|
? Ordinary shares |
xxx |
|
Total external financing |
xxx |
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Financing surplus (requirement) + Total external financing |
xxx |
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|
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Proof: ? Cash and marketable securities |
xxx |
Figure 1: Sample cash flow summary
As the sample cash flow summary shows, it is divided into eight different segments populated by items from the balance sheets. The summary enables the bank to evaluate the impact of changes in these items on the cash flow of the company. Any change in item that is a source of cash is added, whereas a change that uses cash is deducted. The final figure arrived at in the summary of “Financing surplus (requirement) + Total external financing” should equal the change in the cash balance at the end of the year over that of the previous year.