Cash Flow Analysis and Forecasting: The Definitive Guide to Understanding and Using Published Cash Flow Data

16

Generating a Cash Flow Summary from Profit and Loss Account and Balance Sheet Data

This chapter deals with the process of estimating cash flow information from profit and loss account (P&L) and balance sheet data.

Before reading this chapter it is essential that the reader has read and digested the earlier chapters on summarising and evaluating cash flows in Jury’s Cash Flow Template format. Virtually all of the terminology used in this chapter has been introduced and explained earlier in the book.

THE NATURE OF THE PROBLEM

There are a variety of risk management scenarios where there may be a desire on the part of the analyst or a counterparty to identify and assess the cash flow performance of a business that does not publish a cash flow statement. Those involved in credit-based transactions and those who are considering the purchase of a business are two examples.

Small- and medium-sized businesses in the UK are not required to publish cash flow statements when they file accounts. This concession to smaller businesses is common in other parts of the world. Business performance information is typically presented to an analyst or other interested parties in the form of a profit and loss account (P&L) and balance sheet. Secondly, much management information, particularly in product-based companies is focused around P&L and balance sheet information.

So, if we wish to examine an entities cash flow performance, what can we do about this problem?

Earlier in the book we found out ...