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BU121 Lecture Notes - Cash Flow Statement, Cash Cash, Cash Flow

Course Code
Roopa Reddy

of 2
Evaluating Financial Performance
Monday, February 18, 2013
9:06 PM
Cash is currency of business
Businesses that show profit can still go bankrupt (profit doesn't equal cash)
Creating a statement of cash flows: adjust profit to show impact on cash)
Cash (survival) breakeven is when EBDAT = 0
Calculating EBDAT, breakeven, driving breakeven (contribution margin and
Creating a cash budget
Developing worksheet- to manage timing of cash inflows and outflows
Format and process
Evaluating Financial Performance
Why evaluate financial performance?
Principle 1: real human, financial capital must be 'rented' from owners
Principle 5: venture's financial objective is to increase value
Different analytical measures are important to different users at different
Analytical Measures
Development and Startup Issues:
How quickly ventures uses cash- cash burn rate
Venture's ability to meet short term financial obligations (pay bills)-
Length of operating/working capital cycle- conversion period (from
receivables to cash)
Survival Issues
Venture's potential to employ and repay debt- leverage
Venture's ability to provide return on invested capital -
Financial Ratios
What are they? - interpretation instead of calculation
What do they tell us? - which area to look further into
Key Ratio Groupings
Liquidity- ability to meet short term obligations
Conversion period- time to convert asset into cash (affects
Leverage- implications relating to use of debt
Profitability and efficiency
Analytical techniques
Industry comparable analysis - compare against average
Cross sectional analysis - compare to specific firms
Trend analysis - compare over time
Lower but improving is different from getting lower
Cash Burn Rates and Liquidity
Cash Burn Rate
How quickly a venture 'burns through'/uses cash
Determine weeks of cash remaining
Cash Build Rate
How quickly venture builds cash through collections on sales
Ability of venture to maintain a build rate high enough to meet its
obligations as they come through
Measuring Burn and Build Rates
Cash burn = cash venture expends on its operating and financing
expenses and its investment in assets
Cash Burn
= Cash Operating Expenses (includes COGS)+ Interest + Taxes
+ increase in Inventories
– changes in Payables and Accruals
+ Capital Expenditures
Cash Build = what venture receives on its sales
Cash Build
= Net Sales – Increase in Receivables
Net cash Burn - when cash burn > cash build
oNegative amount -> net build
Monthly Burn Rate
oMonthly cash burn rate - monthly cash build rate = monthly net cash
burn rate
Burn and build rates can also be determined using cash flow statement
Cash flow from operating activities and investing activities