Financial Management in the Short Term.fr.en

CLASSES
SHORT-TERM FINANCIAL MANAGEMENT
SESSION 1
INTRODUCTION TO THE COURSE
ACCOUNTING REMINDERS
CASH FLOW ANALYSIS
Francois LONGIN
www.longin.fr
SESSION 1
INTRODUCTION TO THE COURSE
ACCOUNTING REMINDERS
CASH FLOW ANALYSIS
Purpose of session 1: review the main accounting tools used in finance (the balance sheet and
the income statement) which make it possible to calculate the cash flow and assess the quality
of cash management, analyze the cash flow by the external method of ratios and the internal
method of flow tables.
I) INTRODUCTION TO THE COURSE
1) Corporate treasury
2) Course outline
II) ACCOUNTING REMINDERS
1) The three business cycles: investment, operation and financing
2) The balance sheet
a) The large amounts of the balance sheet: fixed assets and current assets for assets, and
permanent capital and short-term debts for liabilities
b) The large amounts of the balance sheet: net fixed assets (IMn), inventories (S), the
realizable (R) and available (DIS) assets and equity (FP), medium and long debts
term (DMLT), provisions (PRO), operating debts (FOU) and short-term bank debts
(DCTb) as liabilities
c) Details of positions and operations relating to short-term operations
d) The main aggregates: working capital (FR), working capital requirement (WCR) and
treasury (TRE). Cash flow is linked to working capital and working capital
requirement by the relationship: TRE = FR BFR
3) The income statement
a) Expenses, income and calculation of the company's result
b) Cash management has an impact on the overall result of the company through the financial
result. The financial result can be improved by minimizing the cost of borrowing (to reduce
financial charges) and by maximizing the profitability of investments (to increase financial
income)
III) EXTERNAL ANALYSIS OF THE CASH FLOW BY LAMETHODE OF RATIOS
1) Cash flow, liquidity and risk of bankruptcy
2) Liquidity ratios
3) Measurement of the risk of bankruptcy (ratio analysis, method of rating, method of scores)
IV) INTERNAL CASH FLOW ANALYSIS
1) The Financing Table (TF). One of the objectives of the TF was to study the cash flow from the
working capital
2) The Table of Jobs and Resources (TER). The TER makes it possible to relate the cash flow to the
change in working capital and to the change in working capital requirement
3) The Financial Flows Table (TFF). The TFF makes it possible to link the cash flow to the
events generating it: investment, operation, donors (shareholders and creditors)
and State
Francois LONGIN
www.longin.fr
COURSE MAP
SHORT-TERM FINANCIAL MANAGEMENT
• SESSION 1: Accounting reminders and treasury analysis ie
• SESSION 2: Relationship between long-term funding decisions and
Treasury
• SESSION 3: Treasury plans ie
• SESSION 4: Banking and finance vocabulary
• SESSION 5: Loans and short-term investments
• SESSION 6: Day-to-day treasury management
• SESSION 7: Financial risks
• SESSION 8: Currency risk
• SESSION 9: Interest rate risk
• SESSION 10: QUIZ
Francois LONGIN
www.longin.fr
BUSINESS MODELING
CYCLE
INVESTMENT
CYCLE
FINANCING
CYCLE
OPERATING
DISBURSEMENTS and DISBURSEMENTS
TREASURY
ERR> 0
INVESTMENTS
TRE <0
FI FINANCING
BANKS
FINANCIAL MARKETS
Francois LONGIN
www.longin.fr
DEFINITION OF THE THREE CYCLES OF THE COMPANY
INVESTMENT CYCLE
The investment cycle consists of three phases: the selection of
investments, their use and their depreciation and eventual resale.
A CYCLE OF EXPLOITATION
The operating cycle corresponds to the productive activity of
the company, that is to say the transformation of raw materials
purchased into finished products sold to customers or to the
production of services. This operation requires the implementation
of the production tool and human resources. The operating cycle
corresponds to the consumption of material, labor and production
capital (the depreciation of investments during production).
FUNDING CYCLE
The financing cycle corresponds to all the financial operations
of the company related to the financing of investments, the various
phases of the operating cycle, the distribution of profits and the
operations of collection and settlement.
Exercise: show how these cycles, which give a functional description
of the company, are found in the accounting documents that are the
balance sheet and the income statement.
Question: finance textbooks always present the three cycles of
the financial circuit of the company (investment, operation and
financing) but only underline the importance of investment and
financing decisions. Why?
Exercise: Citing funding choices and decisions.
Francois LONGIN
www.longin.fr
THE BALANCE SHEET
ACTIVE
LIABILITIES
Fixed assets
Fixed assets
IMn
FP
Medium Debt
Long term
DMLT
Stocks
PRO
Feasible
Short Term Debts
operating
Available
Short Term Debts
banking
R
Dis
Francois LONGIN
DCTexp
DCTb
Short term debts
Current assets
S
Provisions
Permanent capitals
Own funds
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THE BALANCE SHEET
The balance sheet is a photograph of the financial situation of the
company at any given time. It is an account of stocks.
Assets list everything the business owns and liabilities list
everything the business owes. The difference between the assets and the
debts (in the liabilities) constitutes the wealth of the shareholders which
one finds in the equity.
ACCOUNTING APPROACH VS FINANCIAL APPROACH
The balance sheet accounting approach is mainly historical and
functional. Transactions are entered at their historical cost and are
allocated according to their belonging to the investment, operation
and financing cycles. In contrast, the financial approach considers
the true value of balance sheet items and their degree of liquidity
(for assets) and due date (for liabilities).
Francois LONGIN
www.longin.fr
BALANCE SHEET ASSETS
The General Accounting Plan (PCG 1982) distinguishes two
major assets: fixed assets (investment cycle) and current assets
(operating cycle and cash flow).
INVESTMENTS
The fixed assets constitute the goods owned by the company which
constitute the production tool. They are not meant to be sold.
There are three types of fixed assets: tangible fixed assets
(land, buildings, tooling and transport equipment, etc.), intangible
fixed assets (goodwill, patents, etc.) and
financial fixed assets (long-term participations in other companies,
shares and fixed bonds, loans to partners and staff, etc.).
In the accounting approach, fixed assets are recorded at their
acquisition price (gross fixed assets) possibly less any depreciation
suffered by the value of certain assets over time (depreciation). The
balance (net fixed assets) represents the book value of these fixed
assets:
IMn = IMb AM.
Exercise: the 1er July, the company FINEX buys a vehicle for an amount
of 10,000 euros depreciable on a straight-line basis over 4 years.
Account for this operation.
In the financial approach, fixed assets are valued at their
market value.
Francois LONGIN
www.longin.fr
STOCKS
These are goods purchased or produced by the company and
intended to be sold. Raw materials and merchandise are recorded
at the purchase price. Products in process and finished products are
recorded at cost.
THE ACHIEVABLE
Realizable includes receivables held by the business that will be
liquidated in the short term. These are mainlyreceivables (customers,
EAR customers, EENE customers in the off-balance sheet). The other
achievable items concern VAT to be recovered, receivables from third
parties (which are not linked to operations), advances on orders, prepaid
expenses, etc.
In the accounting approach, trade receivables are differentiated
according to their form. For example, non-discounted trade receivables are
shown on the balance sheet while expected trade receivables are shown off
balance sheet. In the financial approach, discounted trade receivables are
reintegrated into the balance sheet and the corresponding discount credit
is recognized as an offsetting entry in the liabilities in short-term bank
debts.
Exercise: explain why all trade receivables are grouped together in the
balance sheet of the financial approach.
Francois LONGIN
www.longin.fr
Exercise: record the sales transactions of examples 1, 2 and 3 described
in the following diagrams (the value of the stock is 60 euros and the
sale is 100 euros). Establish an accounting balance sheet and
financial statement as well as an income statement.
ANALYSIS OF A SALE
First example: Cash sale
Sale to customer on date t
(delivery of goods + invoice)
Business
Customer
Customer payment by date t
Second example: 90-day credit sale and payment by check
Sale to customer on date t
(delivery of goods + invoice)
Business
Customer
Customer payment by check on the date t +90 days
Francois LONGIN
www.longin.fr
Third example: 90-day credit sale and payment by draft
Sale to customer on date t
Return of the draft signed by the customer to
CASE 2: The bank grants a loan
CASE 2: The company discounts the
draft to the bank on the date t + 30 days
Customer
at the date t + 30 days
at the bank on the date t + 90 days
Business
discount to the company
CASE 1: The company carries the bill for collection
(delivery of goods + invoice + bill)
the company to date t + 5 days
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Francois LONGIN
www.longin.fr
Exercise: calculate the amount of trade receivables at the end of the
month and the cash receivables during the month for a company
whose monthly sales amount to 100 ME and the customer credit
policy breaks down as follows: 10% of customers pay cash, 40% of
customers pay by 30-day check and 50% pay by 60-day draft.
AVAILABLE
The available includes the financial accounts that are the
investment securities (listed or unlisted shares, listed or unlisted
bonds, Treasury bills, etc.), the bank account, financial
institutions and similar (cash values, accounts in euros or in
foreign currencies, postal check accounts, etc.) and the account
checkout.
Exercise: explain why some companies want to have a
minimum level available.
EQUALITY OF ASSETS
Assets can be summed up by accounting equality:
ACTIVE = IMn + S + R + DIS.
Francois LONGIN
www.longin.fr
BALANCE SHEET LIABILITIES
The General Accounting Plan distinguishes two large amounts on the liabilities
side of the balance sheet: permanent capital and short-term debts.
Permanent capital (CP) includes equity (FP), medium-long term
debts (DMLT) and provisions (PRO):
CP = FP + DMLT + PRO.
Short-term debts (DCT) include short-term operating debts
(DCTexp) and short-term bank debts (DCTb):
DCT = DCTexp + DCTb.
OWN FUNDS
Equity includes share capital and issue premiums (CAP),
reserves (RES) and net profit for the year (BENnet):
FP = CAP + RES + BENnet.
The accounting approach considers a balance sheet before
distribution in which the net profit is included in equity. The financial
approach considers a balance sheet after distribution in which the
undistributed part of the net profit remains in equity while the part that
will be distributed to shareholders in the form of dividends is included in
short-term debts.
Francois LONGIN
www.longin.fr
LONG-TERM AMOYEN DEBTS
These are debts contracted by the company with an original
maturity of over one year. These debts can take the form of bonds
or bank loans.
In the accounting approach, the part of long-term debts that
have become short remains in long-term debts. In the financial
approach, the part of long-term debts that have become short is
included in short-term debts.
PROVISIONS
The provisions are subdivided into regulated provisions (the
loss on old stocks of raw materials linked to the increase in their
price on the markets since their purchase), provisions for risks and
charges (the indemnities that could be paid to the opposing party at
the end of a lawsuit) and provisions for depreciation on fixed assets
(the deterioration of a machine that will have to be replaced) on
stocks (goods damaged during a storm) and on customers (nonpayment likely from a customer).
In the accounting approach, all provisions are grouped
together. In the financial approach, provisions that could give rise to
disbursement in the near future are included in short-term debts.
Francois LONGIN
www.longin.fr
SHORT-TERM OPERATING DEBTS
Short-term operating debts mainly contain the supplier
credits (suppliers and EAP suppliers). Other debts (sometimes
called non-operating) include: credits granted by suppliers of fixed
assets, VAT to be paid, corporation tax to be paid to the tax
authorities, social charges to be paid to URSSAF, advances and
down payments received on orders ...
SHORT-TERM BANKING DEBTS
Short-term bank debts include current bank loans (credit for
the mobilization of trade receivables, mobilization of foreign
receivables, short-term credit line such as overdraft, etc.). The
financial approach considers all short-term bank loans including
discount credit (and commercial paper issued by the company).
EQUALITY OF LIABILITIES
The liabilities can be summarized by the following accounting equality:
PASSIVE = FP + DMLT + PRO + DCTexp + DCTb.
Francois LONGIN
www.longin.fr
CASH
ACTIVE
LIABILITIES
Own funds
FP
Fixed assets
IMn
Medium Debt
Long term
DMLT
Stocks
Provisions
S
PRO
Feasible
R
Available
Dis
Short Term Debts
operating
DCTexp
Short Term Debts
banking
DCTb
TRE = DIS DCTb
Francois LONGIN
www.longin.fr
BALANCE SHEET AGGREGATES
Working capital (FR) is equal to the difference between
permanent capital (CP) and net fixed assets (IMn):
FR = CP IMn.
The working capital requirement (WCR) is equal to the difference
between on the one hand stocks (S) and trade receivables (CL), and on the
other hand supplier credits (FOU):
WCR = S + CL CRAZY.
The working capital requirement corresponds to the financing
requirement generated by the operation. It can be defined more
generally as the difference between operating assets and operating
liabilities considered in the broad sense:
BFR = S + R DCTexp.
Cash (TRE) is equal to the difference between the available
(DIS) and short-term bank debts (DCTb):
TRE = DIS DCTb.
Exercise: demonstrate the relationship between the treasury ie the working
capital requirement and the working capital: TRE = FR BFR. Interpret this
relationship.
Francois LONGIN
www.longin.fr
Synthesis exercise:
The balance sheet of the company FINEX at December 31 of
year NOT is given below:
ASSETS (in ME)
LIABILITIES (in ME)
IMn
S
Cl
Dis
35 44
FP + BENnet
10 16
CRAZY
Total
79 79
19 4
15 6
9
PRO
DMLT
DEC
Total
Hor s balance: EENE = 15
As every year, the company should pay dividends to
shareholders in April for an amount of 3 ME. Medium-long term
debts that became due on December 31 of the yearNOT
amount to 3 ME. A part of the provisions (3 ME) concerns the risk
associated with the loss of a lawsuit whose outcome will be known
next September. A building purchased at a price of 20 ME and
recorded in fixed assets is valued today at 40 ME.
Establish the financial balance sheet of the company FINEX from the
balance sheet and the above information.
Calculate the value of the FR, BFR and TRE aggregates from the accounting
and financial statements. Comment.
Francois LONGIN
www.longin.fr
THE INCOME STATEMENT
CHARGES
PRODUCTS
Charges
operating
Products
operating
Charges
financial
Charges
exceptional
Products
financial
Tax
on profit
Net profit
Francois LONGIN
Products
exceptional
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IMPACT OF CASH MANAGEMENT
ON THE ACCOUNT OF
RESULT
CHARGES
PRODUCTS
Charges
operating
Products
operating
Charges
financial
Charges
exceptional
Products
financial
Tax
on profit
Net profit
Francois LONGIN
Products
exceptional
www.longin.fr
THE INCOME STATEMENT
The income statement explains the change in the company's
wealth over a given period. It includes the company's income and
expenses over the period. It is an account offlux.
OPERATING RESULT
Operating profit is defined as the difference between
operating income and operating expenses. It corresponds to the
accounting result generated by operations. Operating income
mainly includes sales. Operating expenses mainly include
purchases, salaries and social charges, external charges and
depreciation expense. Income and expenses are entered on their
transaction date and not on their settlement date.
Exercise: an industrial company buys raw materials for
10.000 euros. Ces matières premières entrent ensuite dans le processus
de production pour être transformées en produits finis. Les dépenses
d’exploitation s’élèvent à 1.000 euros pour les salaires et 1.500 euros pour
les autres charges. Les produits finis sont vendus 15.000 euros.
Comptabiliser ces opérations et mettre en évidence le phénomène de
création de r ichesse par l’entrepr ise.
François LONGIN
www.longin.fr
RESULTAT FINANCIER
Le résultat financier est défini comme la différ ence entre les
produits financier s (produits des participations, revenus des titres
immobilisés et des prêts, revenus et produits nets des valeurs
mobilières de placement…) et les charges financièr es (interest on
medium-long term loans and credits, interest on short-term loans
such as discount and overdraft, exchange losses, net charges on
sales of marketable securities, etc.).
Exercise: the 1er January, a company borrows 1,000,000 euros
from its bank. This loan is repaid over 4 years in equal
installments of capital. Interest is paid annually. The interest
rate is 10%. Calculate the financial charges recorded each year.
EXCEPTIONAL RESULT
Exceptional income is defined as the difference between
exceptional income and exceptional expenses. It includes capital
gains and losses on disposals of fixed assets.
Exercise: the 1er July, the company FINEX bought a vehicle for an amount
of 10,000 euros depreciable on a straight-line basis over 4 years. She sold
this property on December 31 of the following year at the price of
8,000 euros. What is the impact of this sale operation on the
exceptional result?
GROSS RESULT
Gross profit (before employee profit-sharing and before tax) is
the sum of operating profit, financial profit and exceptional profit.
NET PROFIT
The net result corresponds to the result after employee profit
sharing and after tax on profits.
Francois LONGIN
www.longin.fr
INTERIM MANAGEMENT BALANCES
Interim management balances are aggregates derived from the
income statement. They are used to measure the internal flows of the
company.
GROSS OPERATING SURPLUS
The gross operating surplus corresponds to the profit generated by
the operation regardless of the financing policy adopted (which affects
the financial charges), the tax rules (which concern the depreciation and
provisions) and the calculation of the tax.
The gross operating surplus (EBE) corresponds to the actual flows
generated by the operation of the production tool.
EBE = Sales + ∆Stocks Purchases External charges Salaries.
Exercise: determine the relationship between gross operating
surplus (EBE) and operating cash surplus (ETE).
CASH FLOW
The gross cash flow is made up of the balance of flows
recognized in the income statement for the period which gave rise
or which will give rise in the short term to receipts or disbursements.
Cash flow from operations (MBA) represents the amount of
funds available to the company to carry out new projects. These
funds come from the normal operating activity of the company and
the exceptional activity of the company.
MBA = BENnet + DOT.AM. + DOT.PRO.
Exercise: Explain the reasoning behind the above equation.
Francois LONGIN
www.longin.fr
SELF-FINANCING CAPACITY
The good result of a company is sometimes due to exceptional
events (the sale of a building or the transfer of a stake in another
company).
Self-financing capacity (CAF) represents the amount of funds
available to the company to carry out new projects coming solely
from the normal activity of the company. The CAF can be calculated
from the MBA:
CAF = MBA Exceptional result.
One of the components of exceptional income corresponds to capital
gains or losses on the disposal of fixed assets (PVCMVC).
Francois LONGIN
www.longin.fr
CASH FLOW ANALYSIS
CASH
Cash is defined as the difference between cash on hand and
short-term bank debts (TRE = DIS DCTb). The level of a company's
cash flow reflects the company's ability to meet its commitments
(payment of salaries, payment of suppliers, repayment of financial
debts, payment of taxes and social charges, etc.)in the present.
LIQUIDITY
Liquidity is the greater or lesser ease with which an asset (here
stocks and trade receivables) can increase cash flow, i.e. be
transformed into available (cash or cash) or reduce short-term bank
debts ( credits or overdraft). The degree of liquidity of a company
reflects its ability to meet its commitmentsin the near future.
THE RISK OF BANKRUPTCY
The risk of bankruptcy is uncertainty greater or lesser of the
company's ability to meet its commitments in the near future. The
risk of bankruptcy arises when the company is in a state of
insolvency (the level of cash is insufficient to meet the
commitments).
Exercise: explain how the state of insolvency is concretized in
practice?
Francois LONGIN
www.longin.fr
CASH FLOW ANALYSIS
FROM LIQUIDITY RATIOS
PROBLEM
The level of cash in the near future depends on the level of cash in the
present and the commitments of third parties to the company and the
commitments of the company to third parties in the near future. These
commitments are mainly found in the middle and bottom of the assets and
liabilities of the balance sheet.
The liquidity of the company therefore depends on two elements
which must be compared to each other: the liquidity of the assets and
the exigibility of the debts of the liabilities. The question is: will the
current and future cash flow from the liquidation of assets (sale of
inventory and payment of trade receivables) be sufficient to meet the
company's short-term commitments?
FORMALIZATION
•
Liquidity of an asset
An asset is liquid unless x months if the time needed to convert
it into cash under good conditions (i.e. at its fair price and without
compromising the smooth running of the business) is less than x
month.
• Payability of a debt
A debt is due unless x months if the debt maturity is less than x
month.
Francois LONGIN
www.longin.fr
THEORETICAL MEASUREMENT OF LIQUIDITY
Company liquidity can be assessed by comparing the value of liquid
assets to less than x months to the value of the debts payable at less than x
month. This comparison can be done in the form of a ratio:
L (x) =
Value of liquid assets within x months
Value of debts due within x months
.
This ratio measures the company's ability to meet its deadlines in the
x months to come.
Exercise: determine the value of the liquidity ratio L for a liquid
business.
PRACTICAL MEASUREMENT OF LIQUIDITY
In practice, ratios are defined from the large masses of the balance
sheet (after restatement of the accounts):
• Immediate cash ratio:
Available
Short term debts
• Liquidity ratio: Available + Achievable
Short term debts
• General liquidity ratio: Available + Feasible + Stocks
Short term debts
Exercise: interpreting the liquidity ratios.
Francois LONGIN
www.longin.fr
MEASURING THE RISK OF BANKRUPTCY
Bankruptcy is certain future statements of the company's cash flow.
These states are characterized by excessively negative cash flow. The risk
of bankruptcy can be measured by more or less sophisticated methods:
• RATIO ANALYSIS
The ratio analysis is based on raw statistical data.
The ratios calculated in absolute terms have little meaning. It is
necessary to study the evolution of a company's ratios over time and
compare them to sector averages or to ratios of companies in the same
sector.
• THE RATING
The notation or rating of a company is based on an in-depth
analysis of ratios and of the company (personnel, markets, sectors, etc.)
and results in the risk being summarized in a note (number or letter).
This method is used by the Banque de France and the agencies ofrating
(Standard and Poor's, Moody's…).
• THE METHODS OF SCORING
The methods of scoring are based on sophisticated statistical
models (discriminant analysis). A probability of bankruptcy is
calculated from a set of ratios. This method is used by some banks
to assess the risk of small and medium enterprises.
Francois LONGIN
www.longin.fr
CASH FLOW ANALYSIS
FROM FLOWS
In this approach, cash flow is broken down into several factors.
Predicting these factors then helps predict future cash flow.
EXAMPLES OF DECOMPOSITION
• Approach to the cash flow table:
∆TRE = ∆FR
• Approach to the table of uses and resources:
∆TRE = ∆FR ∆Working capital
• Approach to flow tables:
∆TRE = ∆TREinv +∆TREbf and State +∆TREexp
To study the risk of bankruptcy, financial analysts, banks and
institutions such as the National Accounting Council and the Banque
de France have successively used the cash flow table, then the use
and resources table and finally the cash flow tables. cash.
Exercise: find the approach that matches the relationship ∆TRE
= Receipts Disbursements.
Francois LONGIN
www.longin.fr
ACCOUNTING FLOWS AND MOVEMENTS
DEFINITION
In business accounting, flows can be defined as the accounting
translation of the exchange relationships that the company has with
its environment.
All flows are accounting movements, But not all accounting
movements are flows.
FOUR TYPES OF ACCOUNTING MOVEMENTS
1) Financial flows to which correspond real flows or
that have an immediate or deferred impact on cash flow depending on
whether the transactions are paid in cash or on credit.
Examples: cash purchase (immediate impact on cash
flow) and sale on credit (deferred impact).
2) Autonomous financial flows without real or physical counterpart
which have an immediate or deferred impact on cash flow depending on the
existence or not of time lags.
Examples: obtaining long-term credit (immediate
impact on cash flow) and capital increase in the form of
subscribed but not called up capital (deferred impact).
3) Accounting movements without direct impact on the
cash flow intended to make adjustments to the income statement.
Example: posting of financial charges for the current
year paid for the following year.
4) Accounting movements without impact on cash flow having
for the purpose of discounting the value of goods and receivables.
Example: depreciation allowance.
Francois LONGIN
www.longin.fr
FLOWS INTEGRATED IN THE VARIOUS TABLES
The financing table and the use and resources table integrate
the first three types of accounting movements, namely the
company's flows.
The cash flow statements only include the first two types of
accounting movements that have an immediate impact on cash flow.
Francois LONGIN
www.longin.fr
THE FINANCING TABLE
JOBS
RESOURCES
Capital increases
Acquisitions
∆CAP
ACQ
Reimbursement of
Medium Long Term Debt
RDMLT
New Debts
Medium Long Term
NDMLT
Value of Disposals
CESval
Dividends paid
DIVp
Fund change
Bearing
∆FR
Francois LONGIN
Capacity
Self-financing
CAF
www.longin.fr
THE FINANCING TABLE
GOALS
The main objective of the cash flow table is to analyze how
long-term jobs (investments) are financed by internal (self-financing)
and external resources (capital increases and new medium-long
term debts).
The cash flow table was also used by banks in the 1950s and
60s to assess the risk of bankruptcy. The equation underlying the
reasoning was:∆TRE = ∆FR.
The reasoning was as follows: an increase in working capital
tends to reduce the risk of bankruptcy since, apart from the
variation in working capital, an increase in working capital is equal
to an increase in cash (and therefore an increase in available or a
reduction in short-term debts). The liquidity of the business was
supposed to be influenced by a single factor: long-term
financing decisions.
DERIVATION OF THE TABLE
The cash flow statement corresponds to the change in the top of the balance sheet
over a given period (usually a year).
Exercise: establish the relationship (accounting equality) of
table of
the financing.
ACQ + RDMLT + DIVp + ∆FR = ∆
CAP + NDMLT + CESval + CAF
Francois LONGIN
www.longin.fr
Exercise: build the financing table of the company FINEX for the
year not.
The balance sheets before allocation and not adjusted are given below:
BALANCE SHEET 31/12 /
not1 PASSIVE ASSETS
IMn
S
CL
Dis
210,100
30 50
40 20
10 50
20
10
20
20
290 290
CAP
RES
BENnet
DMLT
PRO
CRAZY
IMPd
DCTb
BALANCE SHEET 31/12 /not
ACTIVE PASSIVE
IMn 240 130 CAP
S 40 60 RES
CL 60 10 BENnet
DIS 10 80 DMLT
30 PRO
20 CRAZY
10 IMPd
10 DCTb
350 350
Other infor statements concerning the operations of the year not:
• The company sold a machine for an amount of 10 (at the time
of sale, the net book value of the machine entered in the
balance sheet was 30) and acquired a new machine for an
amount of 100. Overall depreciations for the year amounted
to 40.
• The increase in activity led to an increase in the operating
working capital requirement items: increase in inventories by
10, increase in trade receivables by 20 and increase in
supplier credits by 10.
• The company increased its capital by 30. Half of the profit for
the previous year, or 10, was paid to shareholders in the form
of dividends.
• The company issued a new long-term loan for an amount of
40. The existing long-term debt was repaid for an amount of
10. The financial charges for the year amounted to 10.
Francois LONGIN
www.longin.fr
• Provisions increased by 10. Gross operating surplus
amounted to 100.
• The tax rate is equal to 50%.
Francois LONGIN
www.longin.fr
LIMITS ON THE USE OF THE FINANCING TABLE
This approach quickly saw its limits:
1) From a theoretical point of view, the reasoning ignored the
change in working capital requirement (∆WCR) which is however
a pivotal variable between the variation in working capital and
the variation in cash as shown by the relationship: ∆FR =
∆WCR + ∆TRE. Stable resources must not only be used to
finance investments but also the permanent part of the
financing requirement linked to operations (inventories and
trade receivables less supplier credits).
2) Historically, the 1950s60s was a period of growth. This
growth in activity has resulted in an increase in the working
capital requirement which has caused serious cash flow
problems for some companies. This phenomenon is called
the scissors effect.
These two limits resulted in the advent of another table: the
table of uses and resources (TER). The TER is a cash flow statement
taking into account the change in all balance sheet items and
therefore the change in working capital requirement.
Francois LONGIN
www.longin.fr
Financial year: consider the company's balance sheet at December 31:
ACTIVE
IMn
LIABILITIES
100
120
S
50
50
CRAZY
CL
50
30
DCTb
200
CP
200
expects growth in
50% activity (turnover growth). This increase is reflected in an
identical increase in items directly linked to turnover
(inventories, trade receivables and supplier credit).
The following year, the enterprise i
Establish the balance sheet at December 31 of the following year.
Calculate the relative change in working capital requirement and cash it in.
Francois LONGIN
www.longin.fr
THE JOBS AND RESOURCES TABLE
JOBS
Acquisitions
ACQ
Dividends paid
DIVp
Repayment of Debts
Medium Long Term
RDMLT
Fund change
Bearing
∆FR
Variation of Achievable
∆R
Change in Inventories
∆S
Tax paid
IMPp
RESOURCES
Value of Disposals
CESval
Capital increases
∆CAP
New Debts
Medium Long Term
NDMLT
Self-financing capacity
CAF
Change in Debt
at Short t Operating term
∆DCTexp
Endowed tax
IMPd
Change in Working
Capital Requirements
∆Working capital
Change in Debt
Variation of Available
∆Dis
•
Francois LONGIN
at Court t Banking term
∆DCTb
Change in Treasury
∆TRE
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THE JOBS AND RESOURCES TABLE
GOALS
The main purpose of the use and resources table (sometimes
also called the cash flow table) is to analyze how all uses are
financed by all resources.
The use and resources table was also used by banks in the
1970s80 to assess the risk of bankruptcy. The reasoning was as
follows: an increase in working capital or a decrease in working
capital requirement tended to reduce the risk of bankruptcy by
contributing to an improvement in cash flow. The equation
underlying the reasoning was:∆TRE = ∆FR ∆WCR. The liquidity of
the business was supposed to be influenced by two factors: longterm financing decisions and operating conditions.
DERIVATION OF THE TABLE
The table of uses and resources corresponds to the variation of the
entire balance sheet over a given period (generally one year).
Exercise: establish the relation (accounting equality) of the table of uses
and resources.
• In developed form:
ACQ + DIVp + RDMLT + ∆S + ∆R + IMPp + ∆DIS = CESval +
∆CAP + NDMLT + CAF + ∆DCTexp + IMPd + ∆DCTb
• In aggregate form:
∆FR = ∆WCR + ∆TRE
Exercise: build the table of uses and resources of the company
FINEX for the year not.
Francois LONGIN
www.longin.fr
LIMITS ON THE USE OF THE JOBS AND RESOURCES TABLE
This approach quickly saw its limits:
1) From a theoretical point of view, the table of jobs and
resources, just like the cash flow statement, includes the first three
categories of flows which cover cash flows but also other accounting
movements which have no direct influence on cash flow.
2) From a historical point of view, the economic crises of the years
197080 resulted in an increase in the difference between certain
accounting quantities and their financial equivalents. This was
particularly the case between operating profit and operating cash flow.
Exercise: explain this last point by reasoning on the equation: ETE =
EBE ∆WCR.
These two limits resulted in the creation of another table: the
table of financial flows (TFF). The TFF is a table summarizing only the
financial cash flows.
Francois LONGIN
www.longin.fr
THE CASH FLOW STATEMENT
Acquisitions
ACQ
Variation of the Treasurer ie
investment
∆TREinv
Value of Disposals
CESval
Repayment of Debts
Medium Long Term
RDMLT
Financial expenses
FF
Dividends paid
DIVp
Tax paid
IMPp
Increase in capital
∆CAP
New Debts
Medium Long Term
NDMLT
Variation of the Treasury with
donors and the State
∆TREbf and State
Change in Operating Working
Capital Requirements
∆BFRexp
Variation of the Treasurer ie
Gross operating surplus
EBE
operating
∆TREexp
Change in Debt
at Court t Banking term
∆DCTb
Variation of Available
∆Dis
Variation of the Treasurer ie
∆TRE
Francois LONGIN
www.longin.fr
COMPANY CASH FLOWS
CREDITORS
SHAREHOLDERS
THE COMPANY
STATE
OTHER
COMPANIES
Exercise: indicate the cash flow ie between the company and the other
actors.
Francois LONGIN
www.longin.fr
CASH FLOW STATEMENTS
GOALS
The primary purpose of the cash flow statements has been to
demonstrate certain corporate finance results from the accounting
framework. It is in particular the theory of the financial structure and the
value of the company developed by Modigliani and Miller.
Cash flow statements have also been used to break down cash
in a more realistic way.
Exercise: characterize "a flow of treasury ie" in practice?
DERIVATION OF THE TABLE
The cash flow statement is derived from the cash flow
statement.
Exercise: establish the relationship (accounting or financial equality) of the
cash flow table ie.
• In developed form:
ACQ + DIVp + RDMLT + FF + IMPp + ∆BFRexp + ∆Dis
= CESval + ∆CAP + NDMLT + EBE + ∆DCTb
• In aggregate form:
∆TRE = ∆TREinv + ∆TREbf and State + ∆TREexp
Francois LONGIN
www.longin.fr
Exercise: construct the table of cash flows of the FINEX
company for the year not.
Exercise: compare the different flow tables (financing table, use
and resources table, and treasury flow table) by analyzing the
following criteria: the nature of the listed flows, the closing
variable (which represents the fundamental quantity on which
the table is balanced), the analysis of the treasury ie, and the
objectives of the table.
Francois LONGIN
www.longin.fr
FLOW TABLES
ACCOUNTING DOCUMENTS
(Balance sheets, income statements, amortization table, appendices, etc.)
FINANCING TABLE
(Table of variation of the top of the balance
sheet) End of the 1960s: listed companies
1982: National Accounting Council 1984: Law
making it a mandatory document for
medium and large companies
1985: Approved Management Centers
RESOURCE JOB TABLE (Bottom and top
variation table)
1970: banks
1975: Bank of France
1982: National Accounting Council
CASH FLOW STATEMENTS
1977: Murar d
1978: Poncet and Por tait model
1979: Levasseur model 1984:
Charreaux model 1987: Banque
de France 1988: Order of
Chartered Accountants
1985: Approved Management Centers
1988: Bank of France
Francois LONGIN
MULTI-YEAR TABLE
FINANCIAL FLOWS
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