Category Archives: Financial Modeling

Irrational Ex-Uber-ance

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In case you missed it, there has recently been some uber-interesting valuation discourse around the blogosphere regarding Uber, the company whose smart phone app connects drivers with those wanting rides. The buzz is about Uber’s pre-money valuation, $17 billion, implicit in its latest round of financing. It all seems, shall we say, a bit aggressive for a company with an estimated $300 million in annual revenue and little if any operating income.

Most prominently in the skeptics’ corner is Aswath Damodaran, a finance professor at NYU, who recently published a detailed analysis and valuation that trimmed the Uber valuation down by about 2/3rds to $5.9 billion.

Most prominently in the advocates’ corner is a Series A investor and current board member of the company named Bill Gurley. Gurley posits an eloquent defense that Damodaran’s numbers are off by a country mile factor of 25 times and that, as the latest group of investors has freely determined, the company is worth every penny of its $17 billion valuation if not more.

There’s tons of interesting stuff and debatable points in both of these analyses (the impending doom of the world’s “car ownership culture”?!?), but, to me, the heart of the issue is something both gentlemen are calling “disruption” aka category-killing. Effectively, Gurley says that Damodaran is missing the boat because he doesn’t understand that Uber is in the process of killing off multiple categories at once and, because of this, the TAM (Total Available Market) is bigger, by orders of magnitude, than Damodaran has considered. Check out this little historical I-told-you-so gem cited by Gurley:

“In 1980, McKinsey & Company was commissioned by AT&T (whose Bell Labs had invented cellular telephony) to forecast cell phone penetration in the U.S. by 2000. The consultant’s prediction, 900,000 subscribers, was less than 1% of the actual figure, 109 Million. Based on this legendary mistake, AT&T decided there was not much future to these toys. A decade later, to rejoin the cellular market, AT&T had to acquire McCaw Cellular for $12.6 Billion. By 2011, the number of subscribers worldwide had surpassed 5 Billion and cellular communication had become an unprecedented technological revolution.”

Damodaran, for his part, says the divergence between his narrative and Bill Gurley’s lies broadly in how their valuations address the “probable”, the “plausible”, and, for good measure, the “possible”.

So where do I stand on Uber’s valuation? I confess to a certain amount of fence-straddling in this particular situation. I know and expect that there are measures of both art and science in any valuation. I stand with Damodaran in trying to factually dissect and understand what is driving this frothy valuation. I stand with Gurley in promulgating huge, radical ideas that break down barriers and ultimately change the world. The verdict awaits.

Posted by: Mory Watkins

Accretion Shortcuts

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Today, a brief posting about shortcuts and practical rules of thumb for figuring out whether a prospective transaction might be accretive or not.

I’ll go ahead and give my caveat emptor right now — these shortcuts are only useful when there’s one type or source of consideration. Well, they can also be used to run sensitivity analysis to establish the relation between accretion/dilution and different types of consideration — but whenever a deal has a mix of consideration, you must follow the complete  analytical process I’ve already described in previous postings (and again summarized below).

So, recall that there are three major ways to pay for a target, each with its own effect on EPS:

  • Cash: foregone interest
  • Debt: new interest paid
  • Stock: dilution due to new shares issued

An All Cash Deal is likely to be accretive if the foregone interest expense is less than the seller’s pre-tax income.  Foregone interest expense may be calculated by multiplying the cash investment rate times the purchase price.

An All Debt Deal is likely to be accretive if the new debt interest expense is less than the seller’s pre-tax income.  New debt interest expense may be calculated by multiplying the interest rate times the new debt (very much the same concept as the All Cash Deal).

An All Stock Deal is likely to be accretive if the buyer has a higher PE ratio than the seller. Here, the buyer is effectively buying “cheaper” earnings.

These methods use differences in consideration to project whether you’re likely to be getting more than you’re paying, all other things being equal.

Unfortunately, there is no shortcut for analyzing accretion if consideration is a mix. You must go through the whole process as described in previous postings:

  • Calculate the EPS effect of each part of consideration (foregone interest, new interest paid, new shares issued);
  • Combine the P&Ls and estimate revenue and cost synergies;
  • Combine the balance sheets and allocate the purchase premium;
  • Step up PPE and expense the projected new depreciation;
  • Write up Intangibles and expense the projected new amortization;
  • Calculate new DTLs.

Done carefully and correctly, this process provides a reasonable preliminary accretion analysis.

Next time, I’ll discuss some of the theory and accounting behind the acquisition of a minority interest.

Posted by: Mory Watkins

Combining Balance Sheets

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Last time I discussed how P&Ls are combined in M&A transactions and the effect of synergies, changes in the mix of consideration, and balance sheet write-ups on accretion (or dilution).

Today, I’m going to turn to the balance sheets. I’ve already mentioned two of the most important balance sheet changes last time – the write-ups for PPE and Intangibles. Here, I’ll tick down the key balance sheet accounts and touch on some of the combining adjustments.

In combining the balance sheets, I must also address purchase price allocation. I’m not going to go into mind-numbing detail; that’s beyond the scope of discussion here (and actual purchase price allocation should be left to CPAs, tax experts, etc.). In broad strokes, the amount of the purchase price paid in excess of the target company’s accounting value must be recorded on the acquirer’s balance sheet. Accounting conventions require that the purchaser first allocate to tangible assets and then to intangible assets. Any amount that cannot be allocated to identifiable assets is recognized as goodwill. Goodwill therefore represents the excess of purchase price over the fair market value (FMV).

Here is my time tested “quick & dirty” method for combining and allocating purchase price to the key balance sheet accounts. Using this process should give you enough rough approximations of opening combined balance sheet figures for preliminary analysis:

Cash: The combined cash balance of buyer and target is reduced by any cash used in the purchase price.

Short Term Assets/Liabilities: No initial adjustments needed; however, future write-off of A/R or changes in accruals may be necessary.

PPE: As previously discussed, the seller’s fixed assets (PPE) are revalued at the time of the deal and are almost always worth more than the carried book value. The incremental value is added to the balance sheet. The resulting incremental depreciation will lower book earnings and may result in the creation of a deferred tax liability (DTL).

Other Intangibles: Like PPE, intangibles are examined and revalued at the time of the transaction. In most cases the intangibles will go up, resulting in incremental amortization that will lower book earnings. This additional amortization is usually not tax-deductible, so a DTL is created. Regarding purchase price allocation, the purchaser must first allocate identifiable intangibles such as trademarks, patents, and other intellectual property. Any amount that cannot be allocated to identifiable assets is recognized as goodwill.

Goodwill: In merger models, the prevailing convention is to zero out existing goodwill on the target’s balance sheet (the new transaction refreshes goodwill and old goodwill is forgotten). New goodwill is calculated by taking the allocable purchase premium less the write-ups for PPE and Intangibles (mentioned above) and also subtracting the net of the write-off of existing DTL and new DTLs created by the PPE and Intangible write-ups.  Goodwill is assumed to last forever on the balance sheet unless there’s an impairment. There is no tax impact for goodwill unless there’s a write-down.

Long Term Debt: Add any new debt issued for the acquisition.

Deferred Tax Liability (DTL): In merger models, the common convention is that existing DTL on the seller’s Balance Sheet is written off at the time of the transaction regardless of the structure of the deal (stock, asset, or 338(h)(10)). Any new DTL will be calculated from the acquirer’s perspective in the future. As discussed above, write-ups for PPE and Intangibles may create new DTLs related to the transaction. The new DTL obligation may be estimated by applying the acquirer’s tax rate to the sum of the PPE and Intangibles write-ups.

Shareholder Equity: In merger models, the common convention is to zero out seller equity and add the APIC of the buyer’s stock. The shareholder’s equity section of the target’s balance sheet is not transferred; instead, goodwill is created on the consolidated balance sheet to represent the difference between the purchase price and book value of net assets acquired.

So that completes the merger of major balance sheet items. Using this method will provide good, quick insight into the combined entity’s opening balance sheet.

Next time, I’ll go over a couple useful shortcuts and rules of thumb for telling right away whether a prospective transaction will be accretive or not.

Posted by: Mory Watkins

Combining P&Ls

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Today I’m going to go into more detail about how P&Ls are combined in mergers — and how it’s analyzed in “real world” corporate M&A.  As I’ve already mentioned, how the P&Ls come together, and what the resulting accretion or dilution will be, drives strategic M&A more than any other factor.  It’s appropriate to drill down now and get more specific about what the combined income statement will look like.

Recall from last time that I addressed synergies and their relative importance. Considering synergies between buyer and seller led to the creation of several new line items on the newly combined P&L: Revenue Synergies (for revenues), COGS Synergies (for direct expenses), and OPEX Synergies (for fixed expenses).

But several other new line items are also needed. Changes to the mix of deal consideration must also flow through the combined P&L. Projected P&Ls include interest income and interest expense figures that assume a certain cash balance. When cash is used as part of the transaction consideration, however, interest income will be lower, so foregone interest on cash is a real cash deal expense that must be considered in accretion/dilution analyses. The potential for cash consideration in the deal means a line item called Foregone Interest is required. Also, a line item called New Debt Interest is necessary, of course, to cover situations where the buyer finances some of the purchase price with debt. Lastly, depending upon the P&L presentation, a line item called New Shares may be needed at the bottom of the combined P&L to show the effect of stock consideration in the deal when calculating accretion/dilution.

Balance sheet write-ups related to the transaction will also affect the combined P&L.  In M&A transactions, the seller’s fixed assets (PPE) is revalued and is almost always worth more than the carried book value.  The incremental increase in value means more depreciation will flow through the combined P&L, so a line item called Depreciation from PP&E Write-Up is necessary.

The other important balance sheet write-up of note concerns intangibles. The amount of the purchase price paid in excess of the target company’s book value is allocated and will usually be at least partially recorded as an Intangible Asset on the purchaser’s balance sheet. The purchaser must first allocate identifiable items (including trademarks, patents, and intellectual property), and then any amount that cannot be allocated to identifiable assets will be recognized as Goodwill. Amortization related to the newly created Intangible Assets will flow through the combined P&L, necessitating a line item called Amortization of New Intangibles. [When there is a relatively large amount of intangibles amortization, it is not unusual to show the accretion/dilution calculation two ways – one including the new intangibles amortization and a pro-forma without it. This is due in some part to the relative subjectivity in purchase price allocation when it comes to intangibles…]

That covers combining buyer and seller P&Ls.  The statements can be literally added together once synergies, changes related to mix of consideration, and balance sheet write-ups are accounted for.

Next time I’ll begin to discuss combining buyer and seller balance sheets in M&A transactions.

Posted by: Mory Watkins

Deal Synergies

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Today, I’m going to briefly discuss one of the holy grails of corporate M&A, and the one that acquirers point to most often for justification in a strategic acquisition: synergies. Here’s how synergies are often considered and modeled in the real world.

Revenue Synergies: There are many reasons why one might think that 1+1 is going to equal 3 in an acquisition — maybe salesmen are going to cross-sell now, maybe one party has a stronger distribution channel, or maybe there will now simply be more manufacturing capacity – but how do you include this in the merger model and acquisition analysis? Very similar to what I’ve said before regarding projections, you should use a “bottom up” approach to calculate revenue synergies. Choose any of the most important metrics from the seller’s revenue model (such as average selling price, average customer value, or average units sold), goose it by a fixed percentage, and then add it to the buyer’s revenue model. You would include these calculations in a separate line item on the projected combined income statement called Revenue Synergies.

Expense Synergies: The thinking here, of course, is that 1+1 is presumably going to equal 1.5. Assumptions must be made regarding both variable and fixed expenses. The methodology will again be “bottom up”. The preferred technique is to estimate seller synergies as a percentage of seller revenues and then apply these to the combined entity. There are typically three main candidate categories for expense synergies — employees, facilities, and capital expenditures:

  • For employees, a macro assumption (based on a more detailed analysis) may be made as to whether headcount falls or average expense per employee falls.
  • For facilities, input from someone on the operating team should guide and inform assumptions as to when facilities will be combined and how much the resulting reduced overall facilities expense will be.
  • For CAPEX, you will probably assume that the seller’s capital expenditures will fall as a result of the business combination. A percentage reduction in CAPEX should be reflected on the combined cash flow statement. Don’t forget that there will also be a corresponding reduction in related depreciation.

Add a COGS Synergies line to the model for variable expense reductions and an Operating Expense Synergies line to the model for fixed expense reductions.  Note that there may also be a need to model so-called “negative synergies” or scenarios where the combined expenses will actually go up.  Examples of this include existing customer overlap, differences in accounting, employee benefits, and conflicting suppliers.

Next time, I’ll discuss some methodology for combining the buyer and seller income statements.

Posted by: Mory Watkins

On Merger Models

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Today, I’d like to discuss and make a couple high level points about merger models and their use in real-life corporate M&A.

First, understand that merger models are, by nature, very income statement-centric. I use merger models first and foremost to analyze potential accretion and dilution in EPS for prospective acquisitions.  For public company acquirers, the name of the game in corporate M&A is to increase EPS. The market is fixated, and to a fault in my opinion (but that’s another subject for another posting), on what immediate effect acquisitions have on the buyer’s reported earnings. Everyone is trying to conclude whether the deal is creating or destroying shareholder value just on the basis of this one little quotient (again, very myopic in my view). Full integration and synergies — be they cross selling, R&D, or even physical plant and manufacturing capabilities — sometimes take years to realize. But that’s beside the point. The reality is that merger models are primarily used to estimate accounting earnings and EPS in the relative near term subsequent to an acquisition.

Second, I use merger models as a tool to analyze how I should pay for acquisitions (note that how much is a completely separate question). To me, buying a company is not unlike buying a house both in terms of process and consideration. Homebuyers and corporate acquirers both typically use a combination of three means to pay – cash, debt, and stock. The cash and debt analogies are easy enough to see; cash is cash, and acquisition debt is analogous to mortgage debt. What about when companies issue stock to pay for an acquisition? This is basically equivalent in home buying to selling or depleting the equity in an existing house to buy another.  Merger models help analyze the complex effects of changes in the mix of consideration (cash, stock, and debt). Note that in addition to combining existing financial line items, new ones, such as Foregone Interest on Cash, New Debt, and New Stock Issued, are created. The merger model must have built-in flexibility to accommodate changes in the mix of consideration, and these changes must flow automatically throughout the model to all the financial statements and analyses.

Third, I use merger models to run scenarios that identify which variables and drivers are most impactful to deal success. There are many moving pieces in a corporate acquisition, and of course many assumptions must be made. But which are the most important to get right? Arguably, the most important factor is always going to be price [My first buyside boss in M&A astutely told me, “Of all the mistakes you can make in a deal, there’s only one you can’t recover from: paying too much.”], but there are loads of others that should be modeled and considered both in isolation and in combinations with other factors. The most important deal drivers include revenue synergies, expected cost savings, mix of consideration, leverage, taxes, and deal structure, among others. Acquirers use merger models to run sensitivity analysis that gauges the relative impact changes in these assumptions will have on that one little magic number mentioned above: EPS.

Don’t forget that merger models literally combine the financial statements of buyer and seller (in ways that are not always completely straightforward). I must and will address how to merge both parties’ financial statements in an M&A transaction in future blog posts.

Next time I’ll discuss more in depth the role of revenue and expense synergies in merger models.

Posted by: Mory Watkins

I Had an Affair With a Model

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Ever build a financial projection model – one that is sophisticated enough to iterate and where changes automatically flow through all the financial statements – and then the balance sheets don’t quite balance when you’re done? It can be a frightening, frustrating, and a mega time-consuming affair.

Here’s some advice and tricks of the trade you can use to fix a leaky projection model. Oh, how I wish someone had shared these with me earlier in my career; I might even have hair left.

Step One: Start with the balance sheet. Go through the balance sheet line by line and trace each line item to the cash flow statement. Make sure each item is represented once and only once on both statements. Put a check beside the balance sheet line item if that is the case. If you get to the end and still haven’t found the problem, there are 3 probable causes to check:

  1. Did you reverse a sign?
  2. Did you double-count an item?
  3. Did you forget to include an item?

Step Two: Let’s further diagnose the problem. A very telling sign is whether or not your balance sheet is off by a constant number each period.

  1. If Off By Constant Number Each Period: This usually means just one number is either missing or flowing through all your statements. Look through the first balance sheet for that exact number. One common cause is that you may have forgotten to include the number in a sum formula.
  2. If Off By a Varying Number Each Period: This may mean that there is more than one mistake, or that the mistake is part of a calculation or percentage. Pay particular attention to tricky items like Deferred Revenue. Here are two good strategies you can use in this situation:
  • Strategy #1: In a column off to the side of the offending balance sheets, calculate the absolute amount of change between periods (the delta) and compare this to the amount the balance sheet is off. Focus in particular on the first period. Try to find the exact delta number on the first balance sheet.
  • Strategy #2: Do exactly the same as Strategy #1, but also calculate the cumulative sum total of the deltas and the delta of the deltas (to see if there is consistency in the delta growth or if the problem is compounding by period).

If all of the above has failed, there is one last base to cover before contemplating the “nuclear option”* …you may wish to examine the input or assumptions sheet if your model has one. Occasionally, the problem doesn’t even reside on your balance sheet or your cash flow statement, but rather in one of your input formulas or assumptions. Check it out.

Next time I’ll begin to discuss Equity Value and Enterprise Value – two fundamental but very important concepts in Corporate Development and M&A.

*The “nuclear option” is, of course, trashing the whole damn model and doing it more carefully next time.

Posted by: Mory Watkins

Projecting Cash Flow

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Having identified and analyzed the comings and goings of a target’s cash flow, it’s time to consider what the future may hold — projecting those cash flows into the future. How much larger (or smaller) will they become, and at what rate will they grow (or shrink)? What will be the principal drivers of cash flow?  How much capital (if any) will be required to finance this growth?

Today I’ll briefly describe the three most basic, macro components of financial projections and tick down the pros and cons of common methodologies used to forecast them.

Revenues are the obvious place to start a projection model. Assumptions for revenue growth typically fall into one of the following three categories:

  1. Simple Growth Rate: A simple percentage growth rate for revenues, period over period, is assumed. The weakness of this method is that logic to back up and fortify the number is needed;
  2. Units Sold (Bottom Up): This method forecasts the specific number of units (or the amount of services) sold. It requires good knowledge of demand, markets, pricing, capacity, etc. All logic necessary for unit sales is implicit in a series of sub-assumptions;
  3. Market Share (Top Down): This method expresses revenues as a percentage of market share relative to the total market. It requires good knowledge about the size of markets as well as the market shares of competitors. This method is actually also a good litmus test to see if macro growth assumptions may have over-reached.

Next, expenses, both variable and fixed, must be projected. The following are the two most common ways of expressing expense assumptions:

  1. Relative to Revenues: Expenses are simply expressed as a percentage of revenues. Again, this method leaves room for debate and creates the need to justify margins;
  2. Unit Cost (Bottom Up): Like the bottom up revenue projection method, this method builds up and assigns costs at a unit level and provides deep insight into specific unit (or labor) costs.

Finally, the capital expenditures needed to support revenue growth must be contemplated in projections. The three most common ways of approaching CAPEX assumptions are:

  1. Historical Average: A frequently used method involves calculating the average of historical capital expenditures as a percentage of revenues, and then using this figure as the basis for future expenditures. Note that this approach is unsuitable if the future must significantly deviate from the past in order to achieve aggressive revenue projections;
  2. PPE Schedule: A detailed fixed asset schedule is prepared to correspond with anticipated revenue growth. This is the most accurate method, but large, specific guesses must be made regarding the pricing and timing of expenditures;
  3. Equal to Depreciation: In theory, you can assume that assets must be replaced at roughly the same rate as they are being depreciated. The caveats here are, of course, that depreciation for accounting purposes often deviates significantly from real world needs for fresh assets, and the past is not necessarily a good indicator of the future.

Thinking through and having a good handle on these three items (revenue, expenses, and capital expenditures) will get you most of the way to accurately projecting a target’s cash flows…and, in turn, establishing valuation parameters.

Next time, I’ll share a couple tried and true methods for finding and correcting mistakes in financial projection models. I only wish someone had shared these tricks with me earlier in my career…

Posted by: Mory Watkins

But, Seriously…Where Is The Cash Flow?

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As discussed last time, everyone (and M&A people in particular) should be a lot more concerned with cash flow than accounting profits. Not to sound like a broken record, but it really is all about cash – the size, surety, and growth of those cash flows is what you’re buying as an acquirer. And the ability to trace those cash flows through the financial statements is a critical skill in M&A, particularly as it pertains to projections and valuation matters. A piece of advice when on the corp dev buyside: You’d better understand very well i) the origins of your target’s cash flow and ii) how it is reflected in their financials.

So let’s take a look at a couple basic business activities and their related cash flow effects. You may find it enlightening…

First, a pretty simple one: What is the cash effect of increasing the depreciation of an asset by $100 and how does it flow through the financials?

  1. On the income statement, if Depreciation is UP, Operating Income is DOWN by $100, therefore Net Income is DOWN by $60 (assuming 40% tax rate)
  2. On the cash flow statement there are two effects – Net Income is DOWN by $60 and Depreciation is UP by $100, so the net effect (all else held constant) is that Total Cash is UP by $40;
  3. On the balance sheet, Cash goes UP by $40, and Net Fixed Assets goes DOWN by $100. Total Assets, then, are DOWN by $60. On other side of the balance sheet, Retained Earnings is down by $60 via lower Net Income (as previously shown in #1), so the balance sheet balances.

Next, a slightly harder one: What is the cash effect of increasing Inventory by $100 (by paying cash), and how does it flow through the financials?

  1. On the income statement, if Inventory is UP by $100 there is NO EFFECT. Recall that Inventory is only reflected on the income statement when it is sold (as Cost of Goods Sold).
  2. On the cash flow statement, Cash from Operations reflects a $100 USE of cash to buy the Inventory, so total cash flow (all else held constant) is DOWN by $100;
  3. On the balance sheet, there is no net effect – Cash has gone DOWN by $100 and Inventory has gone UP by $100.

Last, a slight curve ball: What is the cash effect of increasing Deferred Income Tax by $100, and how does it flow through the financials?

  1. Recall that Deferred Income Tax is a difference between book and cash tax obligations.
  2. On the income statement, if Deferred Income Tax is UP by $100, there is NO EFFECT. The income statement only reflects a “standard”, assumed tax rate.
  3. On the cash flow statement, Deferred Income Tax is reflected as a non-cash add-back and increases cash UP by $100. On a net basis, total cash flow therefore goes UP (all else held constant) by $100;
  4. On the balance sheet, Cash goes UP by $100 and the related liability for Deferred Income tax also goes UP by $100, balancing the balance sheet.

Confused (or enlightened) yet? The point here is that every business activity and event should be examined for a cash consequence. Pick any line item in the financials and trace its link to the cash account. Ignore or misunderstand this relationship at your peril, because in corporate M&A what you’re really buying (apart from strategic considerations) is cash flow. Period.

Next time I’ll discuss some basics of financial modeling and projections.

Posted by: Mory Watkins

Yes, Cash Is King

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A blog about corporate development and M&A would be remiss without discussion, front and center, about cash and cash flow. To paraphrase someone somewhere, “Cash is king”. And cash is really all that matters. But what exactly is cash flow, and what is its place in corporate M&A?

It can get kind of complicated.

Before going any further, let’s start today’s discussion with some points about the cash flow statement and its utility in helping to “read the tea leaves” of a company’s financial statements. [We’ll get to adjusted cash flow and the need for and uses of different definitions of cash flow, including EBIT, EBITDA, levered and unlevered FCF, etc. later…]

The Cash Flow Statement’s Role

The cash flow statement’s purpose is to reconcile non-cash revenue (like accounts receivable) and non-cash expenses (depreciation and stock-based compensation are among the most common) that flow through the financial statements. The cash flow statement tracks the cash that has gone to and through the balance sheet and the income statement during business activities.

You’d be surprised how many business people are unaware that there are huge chunks of cash outflows and inflows (for example, capital expenditures, dividends/stock repurchases, draw downs from credit facilities, etc.) that simply don’t show up on the income statement. Recall that for an expense to show up on the income statement, it need only i) be tax deductible, and ii) be for that period. Long story short: if you’re only looking at a P&L to see if a company has really made money or created shareholder value, you’re probably sadly mistaken*.

In broad strokes, here is how I would describe the cash “flow” of a typical company’s financial statements:

  1. Starting with the income statement, net income and non-cash items flow to the cash flow statement;
  2. Moving down the cash flow statement, operating asset changes from the balance sheet are reflected;
  3. Continuing down the cash flow statement, changes in long term assets are reflected in the “investing activities” section of the cash flow statement;
  4. Continuing down the cash flow statement, how those long term assets were financed (debt or equity) is reflected in “financing activities” of the cash flow statement;
  5. Then the sum of all the changes on the cash flow statement, whether a net increases or decrease in cash, flows to the cash account on the balance sheet;
  6. Lastly, net income from the income statement flows to retained earnings on the balance sheet and, as a result, balances the balance sheet.

Have you ever thought of the cash “flow” through the financials like this?  If not, you may be missing the whole point.

M&A practitioners, in particular, need a solid understanding of cash flow and how various business activities flow through ALL THREE financial statements (the cash flow, balance sheet, and income statements), and what their cash effect is. This, in turn, helps to predict consistency, strength, and growth of cash flow…and thus the value of a company.

*Instead, analyze and understand cash flow because the perceived size, strength, and growth characteristics of cash flow are what gives a business its value.

Next time…some examples of how specific business activities flow through the financials (and what effect they have on cash)…

Posted by: Mory Watkins