Finance (Cash Flow)

Valuing an Idea / Project

• All value is relative: Law of one Price!
• There are two ingredients to conducting a valuation:
• Cash Flows: Who do they "belong" to? Project
• Cost of Capital, r: Who does this "belong" to? Market Place

Principles

• Estimate all cash flows on an incremental basis 

1. Always for each project draw two time lines divided by the same periods of time
2. In the first time line is for the period without the project  ..... (A)
3. In the second line  is for the period with the project ........... (B)
4. The earn is the difference from (A) - (B)

• Main accounting issue is DEPRECIATION because is Made Up
• The second main thing is Non-cash items by tax reasons
• Do not mix Financing with Operations
• The project analysis must be based on ASSETS
• Include the effects of inflation/deflation
• Do not compare projects with unequal lives

Sources of cash flows

• Performance Income Statement
• Show the flow of things during the year
• Balance sheet statement
• A snapshot of assets/stocks

The differences between Balance sheet and Income Statement is FLOW and ++SNAPSHOOT

Cash Flow from Project / Operation

The good companies do the analysis by the sellers. 

The field is called Market and research analysis

Cash Flow is determined by:

• Revenue = (Price)  x (Quantity)
• The price is the market price determined by the marketplace
• Costs of Goods Sold = (Price)  x (Quantity) from your inputs
• The differences is that can be many prices and quantities  
• Selling, General & admin costs
• Depreciation
• How much do you use a (machine)

Cash Flow    

   Revenue 

- Costs of Goods Sold  (COGS)

- Selling, General & admin costs   (SG&A)

- Depreciation  

______________________________

= Operating Profits

- Cash Taxes on Operating Profits

______________________________

= Net Operating Profits After Tax (NOPAT)

+ Depreciation
- Capital Expenditures
- Increases in Working Capital   <=  Account Receivables (AR) - Account Payables (AP) + Inventory
______________________________
= Free Cash Flows (FCF)

Depreciation 

• Depreciation is the non-cash flow item. It is something that is not happening in this year.
• First you subtract the depreciation in order to reduce the taxes, then you need to add to your Net Operating Profits After Tax because depreciation is not real.

Capital Expeditures

• Also known as CAPEX
• Is the amount of money you spend on things that lost a while. Example: A new machine to produce

Working Capital

• Resources to spend before it is produced.
• Example: The inventory
• The field is called Working Capital Management
• This is the reason of the philosophy zero inventory