The Complete CFO Handbook

Chapter 10. Cash Flow Analysis

Agenda Items

Item 1	Discuss the importance of cash flow and its usefulness in financial analysis.
Item 2	Identify the difficulties associated with measuring cash flow.
Item 3	Explain the different cash flow measures and how they can be used: discretionary cash flow, free cash flow, and net free cash flow.
Item 4	Describe how to use cash flow information.

One of the key financial measures that a CFO should understand is the company's cash flow. This is because the cash flow aids the CFO in assessing the ability of the company to satisfy its contractual obligations and maintain current dividends and current capital expenditure policy without relying on external financing. Moreover, a CFO must understand why this measure is important for external parties, specifcally stock analysts covering the company. The reason is that the basic valuation principle followed by stock analysts is that the value of a company today is the present value of its expected future cash flows. In this chapter, we discuss cash flow analysis.

Difficulties with Measuring Cash Flow

The primary difficulty with measuring a cash flow is that it is a flow: Cash flows into the company (cash inflows) and cash flows out of the company (cash outflows). At any point in time there is a stock of cash on hand, but the stock of cash on hand varies among companies because of the size of the company, the cash demands of the business, and a company's management of working capital. So what is cash flow? Is ...