Chapter 5. Evaluating Cash Flow

This chapter covers the compilation and analysis of a company’s cash flows. This information forms the basis for cash forecasting, project analysis, and incremental cash flow analysis, which makes it crucial for many of the most common analyses that a controller is expected to complete. The chapter begins with the most simple form of cash analysis and works up to the most difficult cash flow reporting format; accordingly, it starts with a review of working capital and advances to cash flow models for a capital investment and then to corporate cash forecasts. The chapter concludes with a review of incremental cash flow analysis and the correct interpretation of variations in the flow of cash.

Evaluating Working Capital

The most inexplicable event for a senior-level manager is to see a profit at the bottom of the income statement, and yet field a request from the accounting staff to obtain more cash, because there is not enough on hand to meet all current cash requirements. What happened? There may be large asset purchases, but these normally require the approval of senior management, so everyone is aware of them. The primary remaining reason why there is a cash outflow is that working capital requirements have increased. A controller is frequently called on to review the elements of this key investment area and tell management why increases have occurred and how to reduce them. This section reviews the elements of working capital and how to evaluate ...

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