analyzing cash flow and other financial information

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Chapter Six

Analyzing Cash Flow and Other

Financial Information

McGraw-Hill © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Learning Outcomes6.1 Recognize the fundamental

importance of Cash Flow Analysis6.2 Prepare a Cash Flow Statement

and a Budget6.3 Identify other financial tools

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Cash FlowThe author defines Cash Flow as

“actual cash that flows into the firm, minus the cash that goes out of the

firm.”

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Understanding Cash Flow• The role of the Cash Flow Statement

developed in the due diligence stage of a fledgling venture is substantially different from the financial analysis developed for an ongoing firm.

• The viability of a new business will be determined by Cash Flow.

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Cash Flow Versus BudgetsBudgetexample:

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Cash Flow Versus BudgetsCash Flowexample:

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Finalized Example Cash Flow Statement6-7

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Deviation AnalysisDeviationAnalysis-

analysis of the differences between the predicted and the actual performance.

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Developing Cash Flow Statements: Expenses

• Salaries• Basic Benefits• Taxes/Fees• Cost of Goods Sold• Utilities• Security System• Tools/Machinery• Office Supplies• Travel Expenses

• Insurance• Advertising• Furniture and

Computers• Telephones• Maintenance• Cleaning• Rent/Mortgage

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Developing Cash Flow Statements: Revenues

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Other Financial Tools• Balance Sheet-a summary of the

assets and liabilities of the business• Income Statement-projects the future

income of the organization• Break–Even Analysis-a tool for

estimating when a business’s income exceeds is expenses

• Pro Forma-a term describing estimates of what the balance sheets and income statement will look like

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Break-Even AnalysisClassic Break-Even Diagram

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Break-Even AnalysisEntrepreneurial Break-Even

Diagram

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Summary• Cash Flow Statements-including

inputs and outputs• We examined a Balance Sheet and

an Income Statement• Brief examination of

Entrepreneurial Break-Even Analysis.

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