The document discusses how to analyze and project cash flows, including preparing cash flow statements using the direct and indirect methods, projecting cash inflows and outflows over a period of time based on historical data, and using cash flow analysis to determine a business's current and future cash requirements and maximum loan amount. It provides examples of cash flow statements and the cash flow projection process to help understand cash flow analysis and its applications.
2. Learning Objectives:
When you have studied this module you should:
Learn how to read and prepare Cash Flow Statement of
clients
Understand and learn the basics of Cash Flow Analysis and
Cash Flow Projection
Understand how to use cash flow in future decision making,
particularly in approving loans.
3. Pre-test
Which of the following is part of a Cash flow statement?
Sales on Account / Trade Receivables
Cash Sales
Salaries of employees
Depreciation Expense
4. CASH FLOW STATEMENT
Summarizes each transaction or event that
causes cash to increase (sources of cash) or
decrease (uses of cash)
Classifies inflows and outflows of cash into
3 main categories:
Operating Activities
Investing Activities
Financing Activities
5. 2 Methods in Preparing Cash Flow Statement:
1. Direct Method
Reconstructs income statement by tracing the movement of
cash and adding events not on the income statement that
cause an inflow or outflow of cash.
2. Indirect Method
– Deductive
– Begins with Net Income (After Taxes and Before Donations)
– Adds back all other sources of cash and subtracts all other
uses of cash that can be deduced by changes in Balance
Sheet accounts
– Adds non-cash expenses that appear on the Income
Statement, such as Impairment Losses on Loans.
6. 2 Methods in Preparing Cash Flow Statement:
Direct Method Example: Cash flow from Operating Activities of a general
enterprise project
Ref. Account Name Definition
CASH INFLOWS:
Cash Received from Sales The total value of all sales received in cash from the enterprise. If an
enterprise uses cash accounting, this account is the same as Gross
Sales from the business. It does not include sales on account
(account/trade receivables).
Cash Received from Interest on Savings/
Investments
Total value of all revenue received in cash from Bank Savings, Trade
Investments and Other Investments.
Cash Received as Other Operating Revenue Total value of all other operating revenue received in cash for the period.
(Example: rental income if any)
Cash Received from other sources The value of all received cash not directly from the business or the
enterprise but adds to the sources of cash of the MFI’s client during the
period. This includes loans accessed to support the business, and
salaries earned from practicing a profession/remittances from relatives
which may directly or indirectly support the business.
CASH OUTFLOWS:
Business Inputs The total value of all inventory purchases paid in cash by the business/
enterprise for the period.
Operating Expenses The total value of cost of sales, salaries paid by the business, utility bills
paid in cash for the period.
7. 2 Methods in Preparing Cash Flow Statement:
Indirect Method Example: Cash flow from Operating Activities of a Microfinance Institution
Ref. Account Name Definition
Net Income Before Taxes and Donations Same as Net Income before Taxes & Donations
Depreciation & Amortization Depreciation and amortization expense for the period. This non-cash
expense represents the theoretical decrease in value of a fixed asset.
Impairment Losses on Loans Allowance for Doubtful Accounts (Bad Debts Expense)
Value of Loans repaid The value of all loan principals repaid in cash by the MFI’s clients during
the period. This includes payments related to current and past-due loans
as well as recoveries of written-off loans.
(Value of Loans Disbursed) Loan Releases for the period
8. Cash Flow Projection
Distinction between forecast & projection:
Forecast – is a document that uses all avaliable factors to
make an educated guess that will occur in the
future.
Projection – takes history and projects it into the future
• Help you to build a model of the way in
which cash moves within a project /
enterprise / activity – based on historical
trend or experience.
• Gives idea whether the sales or income you
project will cover the cost of operations.
9. Cash Flow Analysis
Involves the whole process of Cash Flow Statement
preparation and Cash Flow Projection.
Process in reviewing the accuracy of historical data (i.e.
sales/income) reported and used in projection.
Investigating the impact of changing factors
Determines the trend in terms of cash requirement
(current and future) i.e. Loan requirement and timing.
10. Cash Flow Projection: The Process
Step 1: Divide the period of time over which you want to run
your forecast and the length of the period within it.
Step 2: Set up Column Headings
Step 3: Set up Row Headings
Cash Movement Mo. 1 Mo. 2 Mo. 3 Mo.4 Mo. 5 Mo. 6
*For trend analysis, must use specific months (ex, jan.,feb.,march…)
Cash Movement Mo. 1 Mo. 2 Mo. 3 Mo.4 Mo. 5 Mo. 6
1. Inflow:
• Cash Sales
• Other Income
• Loans
2. Outflow:
• Inputs
• Operating Exp.
3. Totals
11. Cash Flow Projection: The Process
Step 4: Provide Values – based on historical data
Cash Movement Jan. Feb. Mar. Apr. May June
Cash Inflow:
Cash Sales XX XX XX XX XX XX
Other Income XX XX XX XX XX XX
Loan -ECLOF XX - - - - -
2. Outflow:
Inputs XX XX XX XX XX XX
Oper. Exp. XX XX XX XX XX XX
3. Totals XX XX XX XX XX XX
Values for costs must be based on REAL prices in the market vis-à-vis historical data.
Keep estimates as realistic as possible.
A MUST! – get actual cash flow report from the client – preferably, ask them to prepare
the projection. Be aware of the trends before finalizing a projection.
12. Cash Flow Projection: The Process
Step 5: Calculate and Analyze
Cash Flow Projection and Analysis Tool:
1. Based on the given data, prepare a Cash Flow
Projection for Inojales TODA;
2. Provide Analysis in terms of:
• Maximum Loan amortization the client can afford
• Translate the amortization to Maximum Loan
amount
• Suggest ways to manage liquidity
