Corporate Valuation Modeling: A Step-by-Step Guide

CHAPTER 8

Reconciling Cash Flow

Most of the core calculations that generate cash flow in from assets and those that set up our liabilities and equity are done. However, there are numerous calculations necessary to understand more about the company’s performance and financial health. Primarily, we should trace cash that is flowing through the company to see how much is earned or used through operations, investing, and financing. In particular, when assessing the viability of a company we should pay particular attention to operational cash flow, which is partially comprised of working capital needs or excess. Once we know more about the sources and uses of cash, we should also take time to implement internal validations that make sure the calculations backing these cash flow figures are absolutely correct.

THE CASH FLOW STATEMENT

The last major financial statement that we have yet to discuss or implement is the cash flow statement. As alluded to in the opening paragraph, this statement organizes the cash flows of a company by operational, investing, and financing activity. The cash flow statement provides an analyst with a picture of the sources and uses of cash in a company. It is relatively simple to set up since nearly all of the calculations are references to sections already calculated in the model. No new conceptual calculations are necessary. Figure 8.1 shows a graphical representation of the cash flow statement in relation to other parts of the model.

Financial modelers ...