10. Projecting Operating Cashflows


In this lesson, we project operating cashflows, relying not on assumptions but drawing from values already in the income statement and balance sheet.

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  1. Lesson Goal (00:04)

    The goal of this lesson is to create projections for cashflows from operating activities.

  2. Projecting Net Profit and Non-Cash Adjustments (00:08)

    When creating projections for the Statement of Cashflows, we don’t need to create a series of assumptions. Instead, we can just link to relevant figures in the Income Statement and Balance Sheet. For example, at the top of the cashflows from operating activities is net profit. We can find the projected net profit in the Income Statement.

    Next we make adjustments for non-cash expenses. The first of these is depreciation. We can include this simply by finding the relevant expense in the Income Statement. The second is deferred income taxes. In this case, the cash flow for the current year will be deferred income taxes in the current year minus deferred income taxes for the previous year. This reflects the fact that an increase in deferred income taxes is good for cashflow, as we have incurred taxes but not yet paid them.

  3. Projecting Changes in Assets and Liabilities (01:20)

    Our cash flow statement contains adjustments for our current assets and current liabilities. In each case, the cash flow adjustment for the asset or liability depends on the change in its value. As a result, we calculate the cash flow adjustment for a year by subtracting the previous year’s value from the current year’s value.

    For assets, an increase in the amount of the asset has a negative impact on cashflow. For example, if we hold more inventory, then we hold less cash. As a result, we place a minus sign around the calculation to account for this. By contrast, an increase in the amount of a liability has a positive impact on cashflow. For example, if payables increase, it means we are not paying suppliers as quickly, which means we have more cash. As a result, we do not need to adjust the sign of the calculation for liabilities.

    After we calculate the adjustment for each of our assets and liabilities, we can calculate the net cash from operating activities, and project this figure for future years.


It's time now to move on to the pro forma statement of cash flows. Thankfully, we don't need to build on the assumptions for the statement of cash flows. Instead we can links values from our Income Statement and Balance Sheet to our statement of cash flows. Let's start with net profit which is pretty straight forward and I'll go find this in the Income Statement.

Here it is. And I'll copy across for the remaining cells. Same with depreciation and amortization. I'll find this value in the Income Statement.

And copy across.

Deferred income taxes is a little different because we actually find this value in the Balance Sheet and for deferred income taxes, we have an increase in cash if deferred taxes goes up because it means that we have more taxes to pay that we've owed and we haven't spent this cash yet. So to calculate the difference, I simply subtract 2015... From 2016.

And copy across for the remaining cells. Now we move on to changes in operating assets and liabilities. For trade and other receivables, if the value goes up from 2015 to 2016, it means that we have more customers who have not yet paid us invoices that have been sent out, which is a negative impact on cash. So when a positive change has a negative impact on cash, I put a minus figure before my formula. And so I'll take the 2016 value portrayed in receivables...

And subtract the 2015 value, which is in cell G80.

The same goes for inventory. If we have more inventory than last year, this is bad for cash. So the formula would be minus, again, 2016 minus 2015.

So I'll find Inventory and subtract...

2015's value.

And I'll copy across as before.

Trade payables is a current liability and this is slightly different. If payables goes up, it means that we have more suppliers that we have not yet paid, which is good for cash. So in this formula, I'll take the 2016 value and subtract the 2015 value.

And this will be G96.

And again, I'll copy across.

The same formula applies for accrued expenses and deferred revenues, so I can fill in these values with Ctrl + D. And to calculate net cash from operating activities, I'll sum these values.

And copy across for net cash from operating activities up to 2020.

In the next lesson, we'll take a look at cash flows from investing activities and from financing activities to finally completing our financial projections.