Author: Collins QianContributor: Chris NelsonbcCash FlowMarch 1998Copyright 1998 Bain CASH is harder to manipulateCash is King!Cash flow is the measure of a companys strategic value.5CU7010598KRAbcBOS Copyright 1998 Bain successful low growth companies tend to have low earnings, but high cash flowAccounting Decision Extended useful plant life from 35 to 45 year schedule Changed the way it accounted for its pension planAdjusted its inventory valuation policyChanged the residual value assumption for cars it leasedEarnings Impact$790MM$480MM$217MM$270MMCash ImpactNoneNoneNoneNoneTotal:$1,757MMNone6CU7010598KRAbcBOS Copyright 1998 Bain add changes in their balance to financing cash flowignore changes in PPE; their cash impact has been addressed through the “capital expenditure” and “depreciation” items in operating cash flowignore changes in deferred taxes; their cash impact has been addressed by the “taxes paid” item in operating cash flow57CU7010598KRAbcBOS Copyright 1998 Bain CASH is harder to manipulateCash is King!Valuation (mergers, acquisitions)Business unit analysisPortfolio managementWhat is the cash generation potential of an investment/ acquisition? What are we willing to pay (in cash) for that investment/acquisition?How healthy is a business unit? What factors have effected the business units ability to generate cash/value over time? How can the business units cash management be improved?What is the overall balance of cash users/cash generators in a clients portfolio of businesses? How does this effect the clients overall cash position/outlook? What restructuring can be done to improve this profile?CF = common denominatorCF = measuring stickCF = portfolio toolSCF, B/S and NotesSCF, B/S and NotesOperating cash flowFinancing cash flow=65CU7010598KRAbcBOS Copyright 1998 Bain & Company, Inc. Takeaway Slides (p. 2)Cash FlowTypes of Cash FlowOperating Cash FlowInvesting Cash FlowFinancing Cash FlowOperating cash flowInvesting cash flowFinancing cash flowAbility of a companys recurring operations to generate cashAbility of a companys investment decisions to generate cashHow a company funds its operationsOperating profits Decrease in working capitalSale of fixed assetsLong-term issuance of shares Examples of sources:Operating losses Increase in working capitalPurchase of fixed assetsRepayment of loans Payment of dividends Examples of uses:Investments in ongoing operations - property, plant and equipment - are included in investing cash flowcash is used to replace assets as they wear outif a business is to grow, additional assets must be acquiredin some cases, the cash used to acquire these assets is generated from the sale of existing noncurrent assetssuch cash inflows, however, seldom cover the entire cost of asset acquisitions. Often times, cash flow from operations is used to finance acquisitions, or, failing a positive operating cash flow, external financing is used Pure financing activities are not included in investing cash flow. They are included in financing cash flowpurchase or sale of divisions or companiesinvestments in unrelated businesses Investing cash flows relating to ongoing operations are used as a measure of the strategic value of a business. Those that are purely financing/investment mechanisms are used to evaluate the financial strategy of the businessOperating cash flow excludes all cash flows related to a firms capital structurecash generation ability is independent of how a firm is financed It excludes one-time eventsthese are not related to a firms recurring operations Operating cash flow is used to measure the strategic value of a businessfor company valuations, operating and investing cash flows are used, not financing cash flow Bain is usually more interested in operating and investing cash flow than in financing cash flowMajor types of financing cash flow include: debt-related transactions 8 changes in long-term debt 8 interest income and expenseequity-related transactions 8 changes in common and preferred stock 8 dividends 8 short-term investmentslong-term asset and liability transactions 8 purchase or sale of a division or company 8 changes in long-term liabilities66CU7010598KRA