1. CASH FLOW ANALYSIS Accrual or Cash basis Accounting? Purchase of goods on credit in year X0100 Selling expenses paid in cash (year X0)50 Sales revenue500 Suppliers due (credit period in months)12 Customers (credit provided, in months)24 Example: A three year business project

2. 3-year results EarningsΧ0Χ1Χ2Total Cash basis-50-100500350 Accrual basis35000 year Remarks? High Profitability Cash shortage in X0 & X1

3. The Importance of adequate cash flows: Shortage of Cash  Failure to pay liabilities due  Bankruptcy

4. Cash Items GAS 1. Cash 2. Deposits 3. Interest coupons due IAS 1. Cash 2. Deposits 3. Interest coupons due 4. Cash equivalents

5. Statement of Cash flows: Importance Liquidity Solvency Earnings Quality Financial flexibility Forecast of future earnings & cashflows

6. Statement of Cash Flows Cash Flows derive (either/or) from  Operating activities – CF(OA)  Investing activities – CF(IA)  Financing activities – CF(FA) Analysis of changes in Cash Balance

7. Algorithm of Cash Flow Statement OAreceipts-payments=CF(OA) IAreceipts-payments=CF(IA) FAreceipts-payments=CF(FA) = Net Cash Flow ΧΧΧ

8. Cash Flows a. Operating Activities Major source of cash Related to working capital accounts b. Investing Activities Fixed assets, investments, securities c. Financing Activities Equity, Loans, Dividends, etc

9. Cash Flows and Business Cycles entry develop maturedecline OA-37158 IA-15-12-8-2 FA185-7-6 Total0000

10. PREPARING THE CF STATEMENT Direct method  Possible only internally within the firm  Detailed information Indirect method  For external users  IAS No 7

11. 1. Operating activities: direct method Receipts from Tax return Interest income dividends customers advances receivables Payments to suppliers wages Interest (debt & leasing) tax expenses Accounts payables

12. Operating Activities: Indirect Method Net Earnings + Non Cash Expenses (Depreciation ) - Non Cash Income - Profit from fixed assets & securities sold + Loss from fixed assets & securities sold (continued next) 12

13. Operating Activities: Indirect Method (continued) - Increase in Current Assets + Decrease in Current Assets + Increase in Short-term Liabilities - Decrease in Short-term Liabilities = Cash Flow from operating activities 13

14. 2. Investing Activities Receipts from Fixed assets sold Investments & securities sold Debt provided installments Fixed assets compensations Payments for Fixed asset purchase Investments & securities purchase Loans provided Capitalized interest expense

15. 3. Financing Activities Receipts from Loans Share capital increase Payments for Share capital refunds Loan installments Leasing installments dividends

16. Accounting data required for CFS Two consecutive Balance Sheets Income Statement Statement of Shareholders’ Equity Appendix and information about:  Changes in fixed assets, revaluations  Changes in Equity

17. Pitfalls in CFS preparation Transactions affecting two activities, e.g. fixed assets sold:  Eliminating profit or loss from Net Earnings and Operating Activities  Amount received to be recorded in Investment Activities

18. CASH FLOW ANALYSIS Operational Activities Normal source of cash Efficient Management OA are positive, except:  In high growth rates  Recession Deficit is covered by CF from IA or FA

19. Methods of Analysis for CF(OA) In relation to liquidity & capital structure ratios In relation to other similar firms Regularity - Trend In relation to the life cycle of the product or the firm

20. Management of CF(OA) Increase with: Strict credit policy to customers Reduced inventories held by:  Production re-engineering  Supply chain management (JIT) Expansion of short-term liabilities (?)

21. CF(OA) Analysis CF(OA) > Current Liabilities  Financial Strength High CF(OA) / Net Earnings  Earnings quality Increase rate of CF(OA)  relates to share value & risk Unsuitable for Return measurement

22. Cash Flow from Investing Activities Reveals growth or shrinkage Affect on future earnings & CF(OA) Consider replacement of old fixed assets Consider maturity of securities Consider strategic investments: (business concentration or expansion?) Over expansion may threat solvency

23. Cash Flow from Financing Activities Benefits from Debt capital: Tax reduction from interest expense Financial Leverage Optimal Relationship of Equity & Debt ROE > ROTA Loan repayment with Free Cash Flows

24. FREE CASH FLOWS – (FCF) ορισμός: FCF=CF(OA) – capital maintenance – loan repayment Available cash flow above necessary needs Accurate calculation of CFC internally only

25. Uses of Free Cash Flows Dividend payment Extended investments Temptation with high FCF Low productivity investments  Luxury assets & spending  High administration or R&D expenses