- The Finance Gem 💎
- Posts
- The Finance Gem 💎 Week #74: Cash Flow and CEOs
The Finance Gem 💎 Week #74: Cash Flow and CEOs
The Finance Gem 💎 Week #74: Cash Flow and CEOs
WELCOME TO ISSUE NO #74
Webinar | Masterclasses | Shop | Newsletter | Speaking | Training
THIS WEEK’S ISSUE AT A GLANCE
This issue’s finance Gems 💎 vote your favorite at the end of the newsletter.
How to Analyze a Cash Flow Statement in 10 Simple Steps
Liquidity vs. Solvency
The 5 Types of Cash Flow
The CEO Checklist
Thank you all for the birthday wishes last week! I’m grateful for this life and all of you! Thank you for appreciating my work and for reading this newsletter.
As an exclusive thank you to all Finance Gem subscribers, for the next few days only, please enjoy 43% off my infographics and my courses with code HCDF6R
In case you missed the Linkedin Announcement, I have officially moved from Canada to California, USA. Goodbye cold 🧊Hello sunshine!☀️ Please reach out to connect if I can help you or your organization!
Work with me. If your finance team is struggling to produce the monthly reports, intelligent forecasts and deep insights you need to grow your business, we can help! Put your long term strategic financial planning on autopilot with 10-year financial reports, 5 year monthly forecasts and intelligent financial analysis that drives growth. Get operational in up to 24 hours and never wait for monthly reports ever again! Visit financiario.com to learn more.
THIS WEEK’S FINANCE GEMS
1. How to Analyze a Cash Flow Statement in 10 Simple Steps
1️⃣ Start with Net Income
🎯 Examine the P&L first because that is where indirect cash flow statements start
🎯 Understand the sustainability and reliability of earnings by examining the revenue and expenses that drive Net Income
2️⃣ Non-Cash Adjustments
🎯 Review adjustments for non-cash items like depreciation, amortization, and stock-based compensation.
🎯 These adjustments reconcile net income to the cash generated from operations.
3️⃣ Working Capital Changes
🎯 Analyze changes in working capital components such as accounts receivable, inventory, and accounts payable.
🎯 Significant changes could indicate operational efficiency or inefficiency.
4️⃣ Cash Flow from Operating Activities (CFO)
🎯 Evaluate the cash generated from core business operations.
🎯 Consistently positive CFO indicates a company’s ability to generate sufficient cash to maintain and grow its operations. Negative CFO should be evaluated depending on context and trends.
🎯 Compare CFO with Net Income over time because a consistent divergence could signal accounting manipulation, unsustainable working capital growing pains, or quality of earnings issues
5️⃣ Cash Flow from Investing Activities (Capital Expenditures and others)
🎯 Check the amount spent on acquiring or improving physical assets.
🎯 High CapEx could mean future growth or just future high maintenance costs.
🎯 Beyond CapEx, large other outflows might suggest growth strategies or diversification.
6️⃣ Financing Activities
🎯 Examine cash flows from financing, including debt issuance/repayment and equity transactions including raises/ distributions.
🎯 This reveals how a company funds its operations and returns value to shareholders.
🎯 Regular dividends can indicate financial stability as long as funded from operating cash flows.
7️⃣ Net Cash Flow
🎯 Assess the net increase or decrease in cash to understand if the company’s cash position improved or worsened.
8️⃣ Free Cash Flow (FCF)
🎯 Calculate FCF (CFO - CapEx) as a key indicator of a company's ability to generate cash after funding both operations and capital expenditures.
🎯 Look for a positive value but assess in context of the company’s financing cash flows and investment + distribution needs
9️⃣ Cash Flow Trends
🎯 Look for trends in the cash flow statement over multiple periods as patterns can reveal cash flow sustainability
🎯 Compare the company’s cash flow metrics with industry peers and historical trends. This contextual analysis helps in understanding the company’s performance relative to its competitors.
🔟 Debt & Taxes
🎯 Assess the company's ability to cover its principal debt payment obligations using cash from operations (CFO).
🎯 Similarly, evaluate how the company is able to manage its interest and tax payments, as these are other key cash outflows.
A WORD FROM THIS WEEK’S SPONSORS
Thank you for helping keep this newsletter free for our 45,000+ readers.
FINANCIARIO.COM
Discover Financiario's turnkey, automated strategic financial planning solution and transform your organization with intelligent, driver-based forecasts, dynamic financial models, power BI dashboards, and presentation ready reports. Also included is dynamic scenario planning, combined entity reporting, multi-currency and full suite financial reporting. Get up and running in as little as 24 hours and never wait for monthly reports ever again.
BILL.COM
Take a demo, get a Blackstone Griddle
Automate expense reports so you can focus on strategy
Uncapped virtual corporate cards
Access scalable credit lines from $500 to $15M
2. Liquidity vs. Solvency
80% of people confuse Liquidity and Solvency.⤵️
Want to guess what happens next?
Their cash flow suffers.
Their business suffers.
Their careers suffer.
Here’s what you need to remember:
▶️ Liquidity impacts your today
▶️ Solvency impacts your tomorrow.
They serve different functions and have different implications.
Understanding how they are different can save your company from a liquidity crunch, from insolvency, or even from bankruptcy.
Here are 4 critical differences between solvency and liquidity you need to know:
1️⃣ They have different time horizons:
↳ Liquidity: Short-term; usually focused on a 12-month period, ensuring you can meet immediate financial obligations.
↳ Solvency: Long-term; spans years, ensuring your company has the required runway ahead to remain a viable business.
2️⃣ They use different financial KPIs:
↳ Liquidity uses balance-sheet-centric, emphasizing short-term health.
Examples: Current Ratio, Quick Ratio, and Cash Ratio.
↳ Solvency uses metrics that cross the income statement and balance sheet, examining long-term viability.
Examples: Debt-to-Equity Ratio, Interest Coverage Ratio, Funded Debt to EBIT, Fixed Charge Coverage Ratio
3️⃣ They monitor different underlying business concerns:
↳ Liquidity is a timing issue testing for enough cash or easily convertible assets to cover immediate liabilities
↳ Solvency is a mix of profitability and cash flow measuring if your business model is sustainable in the long run
4️⃣ They come with different consequences when ignored
↳ Liquidity: Expect a cash crunch, operational setbacks, and tarnished creditworthiness.
If it continues beyond the current operating cycle and requires debt working capital financing, it may convert into a solvency problem, where not enough assets will be available to fund future payment obligations
↳ Solvency: Expect risk of bankruptcy, investor mistrust, and long-term failure.
The CEO Power Bundle
3. The 5 Types of Cash Flows
1️⃣ Operating cash flow
⚫ Represents the net cash generated by your company's core operations
⚫ Calculated by adjusting Net Income for non-cash items & changes in net working capital assets.
⚫ Used to assess:
>> your company's financial health
>> your company's ability to meet its financial obligations
>> your company’s ability to generate sufficient cash to fund ongoing business operations
>> trends in how the business generates cash
2️⃣ Investing cash flow
⚫ Represents the net cash generated by your company's investments in long-term assets such as property, plant and equipment (PPE) as well as securities investments.
⚫ Calculated by totaling the net investments over the period (purchases less sales )
⚫ Used to assess:
>> your company's investment decisions
>> your company's ability to generate returns from its investments
3️⃣ Financing cash flow
⚫ Represents the cash generated by your company's net debt and/or equity activity.
⚫ Calculated by totaling debt and equity proceeds and payouts over the period.
⚫ Used to assess:
>> your company's financing choices and risk profile
>> your company's ability to raise capital
4️⃣ Free Cash Flow to Firm (FCFF or Unlevered Cash Flow)
⚫ Represents the cash remaining in your business after accounting for cash outflows that support product sales and operations (product costs + operating expenses + working capital) and cash outflows that maintain the capital asset base (capital expenditures).
⚫ Calculated by adjusting after tax EBIT for non cash expenses and income, and for investments in fixed and capital assets
⚫ Used to assess:
>> your company's financial strength and ability to generate sufficient cash for growth and reinvestment
>> your company's value based on the discounted cash flow (DCF) valuation.
5️⃣ Free Cash Flow to Equity (FCFE or Levered Cash Flow)
⚫ Represents the cash remaining in your business after accounting for all business expenses, investments in working capital assets, investments in fixed assets, and also all debt obligations.
⚫ Calculated by adjusting Operating Cash Flow for after tax interest expense, investments in capital assets and net debt payments.
⚫ Cash flow available to be used for investments, dividend payments, returns of capital, additional debt repayments, or acquisitions, but skewed by new debt raises.
⚫ Used to assess:
>> your company's ability to generate cash for distributions to shareholders holders
SIGN UP FOR MY FREE CASH FLOW WEBINAR
4. The CEO Checklist
It’s hard being a CEO
Every decision impacts finances,
Team morale, stakeholder satisfaction.
And to succeed, you’ll need a skilled CFO.
And you’ll need to master Strategic Management.
Here are 15 important areas for CEOs to focus on, to help you measure progress and performance:
1. Vision and Strategy Development
🎯Design the future, align with the strategic vision, and craft long-term strategies for achieving objectives.
2. Leadership and Organizational Culture
🎯Cultivate a positive and productive corporate culture.
3. Financial Oversight
🎯 Manage the company’s financial health.
4. Corporate Governance
🎯 Uphold the highest governance standards.
5. Risk Assessment
🎯 Identify potential risks and establish mitigation systems.
6. Operational Excellence
🎯 Streamline operations, enhance efficiency, and encourage innovation.
7. Talent Optimization
🎯 Ensure the right individuals are in appropriate roles to drive the strategic plan effectively.
8. Customer-Centric Approach
🎯 Instill a customer-focused mindset to meet customer requirements.
9. Investor Relations
🎯 Maintain robust and transparent relationships with investors, shareholders, and financial analysts.
10. Brand Integrity
🎯 Serve as the company’s face and ensure actions positively impact the brand.
11. Innovation and Technology
🎯 Cultivate an innovation-oriented culture to stay ahead of technological advancements.
12. Sustainability and Social Responsibility
🎯 Aim to reconcile profit drivers with ethical and sustainable business practices.
13. Stakeholder Engagement
🎯 Skillfully manage relationships with diverse stakeholders.
14. Mergers and Acquisitions
🎯 Assess growth opportunities through mergers, acquisitions, partnerships, or joint ventures and ensure their effective execution.
15. Business Continuity and Succession Planning
🎯 Create and execute a comprehensive business continuity plan for sustained success.
Upgrade your strategic financial acumen and save with my Masterclass Bundle
Master the strategy and fundamentals of financial analysis and cash flow management. Accelerate your career and grow your business with skills that enhance decision-making and amplify your impact in boardrooms, business meetings, and beyond.
We put your money to work
Betterment’s financial experts and automated investing technology are working behind the scenes to make your money hustle while you do whatever you want.
POLL TIME
What was your favorite topic to read this week? |
How did it feel reading this week's issue? |
As always, if you have specific suggestions or feedback, or topic suggestions, simply reply to this email.
HOW I CAN HELP YOU:
Set your company on the right track to drive results with automated financial business intelligence. Reach out here for a demo.
Train your teams or your audience with my strategic finance workshops and presentations. Reach out here for training and speaking.
Bring your brand in front of 45,000+ business decision makers. Sponsor a future issue of The Finance Gem 💎
Visit my store for Viral Finance and Business Cheat Sheets & Checklists.
Thanks so much for reading.
Oana