Corporate Finance, 6th Edition

Chapter 2CASH FLOW

Let's work from A to Z (unless it turns out to be Z to A!)

Let's begin our understanding of the business by analysing the cash flows that pre-exist any accounting or management system.

Section 2.1 CLASSIFYING COMPANY CASH FLOWS

Let's consider, for example, the monthly account statement that individual customers receive from their bank. It is presented as a series of lines showing the various inflows and outflows of money on precise dates and the type of transaction (debit card payment or cash withdrawal, for instance).

Our first step is to trace the rationale for each of the entries on the statement, which could be everyday purchases, payment of a salary, automatic transfers, internet subscriptions, loan repayments or the receipt of bond interests, to mention a few examples.

The corresponding task for a financial manager is to reclassify company cash flows by category to draw up a cash flow document that can be used to:

• analyse past trends in cash flow (the document put together is generally known as a cash flow statement¹); or
• project future trends in cash flow, over a shorter or longer period (the document needed is a cash flow budget or plan).

With this goal in mind, we will now demonstrate that cash flows can be classified into one of the following processes:

• Activities that form part of the industrial and commercial life of a company:
  • operating cycle;
  • investment cycle.
• Financing activities to fund these cycles:
  • the debt cycle;
  • the equity cycle. ...