2012 Skills Based Summit - 3M, Understanding Cash Flow & Long Term Financial Metrics

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2012 Skills Based Summit - 3M, Understanding Cash Flow & Long Term Financial Metrics

  1. 1. Cash Flow & Long Term Financial Metrics Nicholas Salmanowicz & Veronica Wittek, 3M3M Confidential
  2. 2. Agenda Why cash flow is important Statement of Cash FlowsFree Cash Flow (FCF) and FCF ConversionLong Term Financial Metrics
  3. 3. Definition: Cash Flow A revenue or expense stream that changes a cash account over a given period. Cash inflows usually arise from one of three activities - financing, operations or investing - although this also occurs as a result of donations or gifts in the case of personal finance. Cash outflows result from expenses or investments.
  4. 4. Why cash flow is important Managing cash flows helps ensure long-term viability  Ensures liquidity exists when times get tough  Allows for the freedom to make investment decisions that will benefit the company Companies can show increases in earnings not related to cash “All we care about is how much cash a business is likely to produce between now and judgment day” -Warren Buffet
  5. 5. Income Statement Versus Cash Flow September Income Statement  Differences can Revenue 1,000 include:  Cash received for Expenses 750 sales vs. AR Operating Income 250 balance  Expenses paid vs. September Cash Impact AP balanceRevenue 800  AccrualsActual Cash Expenses 375  DepreciationOperating Income 425
  6. 6. Why cash flow is importantMarket Comments – Cash Management is Valued “We expect cash generation to be a key driver of … performance among the best-in-class industrials.” Goldman Sachs The flight to quality mindset that caused banks’ flight to cash has also translated into the equity world as a demand increases for companies with proven cash flows Credit Suisse … companies with strong balance sheets, free cash flow, and trustworthy management will do much better in this market. Integrity as a whole will be a commodity in the coming years as distrust in the system permeates. Market Watch “Four of the top five fund managers list strong cash flows and clean balance sheets among the most important stock investment criteria” Fortune Cash Remains King
  7. 7. Agenda Why cash flow is important Statement of Cash FlowsFree Cash Flow (FCF) and FCF ConversionLong Term Financial Metrics
  8. 8. Statement of Cash Flows Purpose – Cash in, Cash out Three Sections 1. Operating activities 2. Investing activities 3. Financing activities
  9. 9. Operating Activities Two methods of reporting Operating Section 1. Direct • Shows actual cash disbursements and receipts • Only used by 3% of companies 2. Indirect • Net Income is adjusted for cash and non-cash transactions (Accruals, Deferrals, Depreciation/Amortization) • Most common approach among larger businesses
  10. 10. Operating Activities  Cash generated by normal business operations  Changes in inventory, accounts payable, accounts receivable balances  Impact of depreciation  Impact of prepaid or deferred expenses
  11. 11. Operating Activities Cash from operations Asset/Liability change reference Category Balance Sheet Change Cash Flow Impact Asset Asset Liability Liability
  12. 12. Investing & Financing ActivitiesInvesting Cash Flows:  Purchases and sales of fixed assets and software  Cash activity from selling or acquiring business  Cash used or received from the sale or purchase of investments or marketable securitiesFinancing Cash Flows:  Cash activity from borrowing or retiring debt
  13. 13. Company ABCConsolidated Statement of Cash Flows 2011 2012 ChangeCash Flows from Operating ActivitiesIncrease/(Decrease) in Net Assets (1,920) 345 2,265 Adjustements to reconcile change in Net AssetsDepreciation 86 77 (9)(Increase)/Decrease in contracts and grant receivables 1,194 (1,901) (3,095)(Increase)/Decrease in prepaid expenses (5) 0 6(Increase)/Decrease in deferred assets 35 - (35)Increase/(Decrease) in account payable and accrued expenses 92 2,079 1,987Net Cash flows provided by Operating Activities (518) 599 1,118Cash Flows from Investing ActivitiesFixed Asset purchases (14) (3) 11Net Cash flows provided/(used) by investing activities (14) (3) 11Cash flows from financing activitiesNet cash flows provided/(used) by financing activities (751) (321) 430Net Change in cash and equivalentsNet Increase/(Decrease) in cash (1,283) 596 1,880Cash and equivalents, beginning of fiscal year 2,148 1,530 (618)Cash and equivalents, end of fiscal year 865 2,126 1,261
  14. 14. Agenda Why cash flow is important Statement of Cash FlowsFree Cash Flow (FCF) and FCF ConversionLong Term Financial Metrics
  15. 15. Free Cash Flow• Cash From Operations Is Not Enough Fails to account for the cash a company must spend to replace its capital investments as they depreciate• Free Cash Flow is the remaining funds after paying out all operating expenses and replenishing factories/equipment/etc. as they wear out
  16. 16. Free Cash Flow Strong Free Cash Flow Provides Opportunities Free Cash Flow Additional Net Debt & Special Projects Contributions Investments Retirement Maintenance Benefits Strong Free Cash Flow: Essential to Strategy & Future Opportunities
  17. 17. Key TakeawaysWays to improve cash flow  Improve Operating Income • Create efficiencies/ eliminate Low Value added tasks • Ensure over the long term Revenues grow at a faster rate than costs. (Effective Cost control).  Reduce Operating Capital Costs • Use equipment and machinery more effectively • Eliminate unnecessary assets  Reduce working capital • Reduce inventories where appropriate while still meeting customer needs • Reduce customer terms where appropriate to accelerate receivables • Negotiate longer payable terms where appropriate
  18. 18. Agenda Why cash flow is important Statement of Cash FlowsFree Cash Flow (FCF) and FCF ConversionLong Term Financial Metrics
  19. 19. Long Term Financial Metrics Every company, for profit and not for profit, has a mission, vision and overall strategies How do you measure your success on these strategies? Financial metrics and tools help you determine whether or not you are reaching your goals and strategies Long Term Financial Metrics are tools to help you assess the status of your overall strategies This can be done on a quarterly basis or annual basis Comparing to other companies in your industry
  20. 20. Long Term Financial Metrics: Examples Tracking Event Increases/Revenue Growth ROI/ROA Expenses to Revenue – should be ~1x or less Asset Use  AR Turns: Sales/AR  Days Sales Receivable: 365/Receivable Turnover Short Term  Current Ratio: (Current Assets/Current Liab) Long Term  Cash Coverage: (EBIT + Depreciation)/Interest # of months cash on hand Surplus/Deficit as a % expenses
  21. 21. Thank you!

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