F3 - Cashflow Cycles & Analysis CH3 Cash Flow Cycle

Cash Flow Cycle

How do you calculate Operating Cash Flow (OCF) from the income statement?

OCF = Net income + non-cash expenses (e.g. depreciation) − change in net working capital.

What items make up “changes in net working capital”?

Changes in Accounts receivable, Inventory, Accounts payable, other current assets/liabilities.

Why add back depreciation when computing OCF?

Depreciation is a non-cash expense that reduced net income but not cash.

How does an increase in inventory affect OCF?

It reduces OCF (cash used to buy inventory).

How does an increase in payables affect OCF?

It increases OCF (cash conserved by deferring payments).

How does an increase in receivables affect OCF?

It decreases OCF (sales recorded but cash not yet collected).

Investing Cash Flow is equal to?

Capital Expenditures (CapEx) + Purchases of Long Term Investments + Business Acquisitions - Divestitures from selling assets or investments

How do capitalised software costs affect cashflow statements?

Cash outflow in investing (capitalised); amortisation later is non-cash and added back in OCF.

When building an Excel cashflow model, what are the three basic sections to populate?

Operating activities, Investing activities, Financing activities.

Give one tip for forecasting working capital in Excel.

Forecast key drivers (sales growth, COGS margin) and convert to days ratios to derive balances.

How do you estimate receivable days forward in a model?

Project receivable turnover or set a target AR days and apply to forecasted revenue.

What is the effect of one-off large receivable write-offs on OCF?

Write-offs reduce AR (no cash effect at write-off time) and signal past cash shortfalls; they can increase allowance expense (non-cash) but worsen future collections.

How is Free Cash Flow (FCF) commonly defined?

OCF − Net capex ( i.e. maintenance + growth capex).

Why compare OCF to net income?

To check quality of earnings => high OCF relative to net income suggests strong cash conversion.

What Excel check ensures the cashflow statement is correct?

Ending cash on the cashflow statement must equal the cash balance on the balance sheet.

How should you treat proceeds from debt issuance in the cashflow statement?

Cash inflow in financing; principal increases liabilities; interest expense still flows through income statement.

How do dividend payments show up?

Cash outflow in financing; reduce retained earnings and cash.

What ratios help compare cashflow performance across firms?

OCF/Revenue, OCF/Net income, FCF/Net income, Capex/Depreciation, Days sales outstanding (DSO).

Why calculate Operating Line Required in Excel?

To estimate short-term funding needed to bridge the funding gap.

What is a practical bank advance rate assumption?

Lenders often advance a percentage (e.g., 50–80%) of eligible receivables/inventory depending on quality.

How do you test sensitivity of working capital needs?

Run scenarios varying AR days, inventory days, and payable days to see funding gap impact.

What does negative investing cashflow often indicate for growing firms?

Ongoing investment in growth — not necessarily bad if funded sustainably.

How to spot aggressive working capital accounting in statements?

Rapidly increasing AR days, large one-off receivables, or shrinking payables without explanation.

How to use cashflow metrics in credit assessment?

Evaluate ability to service debt (OCF coverage), funding gap, and sustainability of capex vs FCF.

What is a common Excel approach to model payback?

Cumulate project cash inflows until they equal initial outlay — the period when cumulative cash ≥ 0 is payback.

How should seasonality be handled in cashflow modelling?

Use monthly or quarterly granularity and apply seasonal sales patterns to working capital and cash flows.

How does capital expenditure timing affect short-term liquidity?

Large capex in the near term increases cash outflows and may require bridging finance.

What is the purpose of a cashflow sensitivity table?

Shows how funding gap, FCF or NPV change under different assumptions — aids risk assessment.

What’s the single most important reconciliation check after building a cashflow model?

Sum of operating + investing + financing cash flows = change in cash; and new cash = prior cash + change in cash (matches balance sheet).