Sie sind auf Seite 1von 14

Comparative study of cash flow and debt management.

Prof. Heena Shaikh

Asst. professor, Sinhgad Institute of Business Administration and Research (SIBAR, Pune)
Pursuing P.Hd(Management), MBA(HR), M.Sc. (Computer Science)

Kaustubh Jakahde
MBA 1st Year, Sinhgad Institute of Business Administration and Research (SIBAR, Pune)

Iqra Jan
MBA 1st Year, Sinhgad Institute of Business Administration and Research (SIBAR, Pune)

In the literature there is often emphasized the importance of cash flow analysis as an integral
part of financial analysis, however the traditional cash flow analysis is limited to the vertical
analysis of net cash flow from three levels of activities and, more rarely, to ratio analysis
based on these three net cash flows. The purpose of the article is to evaluate the usefulness of
such an analysis in the assessment of a company’s financial position with the aim of
improving it. Therefore, based on the literature review on the cash flow analysis, the authors
highlight the usefulness of the decomposition analysis of the cash flow statement and propose
a procedure for conducting such an analysis, in particular they propose making an in-depth
analysis of the cash flow from operations consisting of several stages.

● Wealth management.
● Cash flow.
● Debt management.
● Debt equity ratio.
● Business cash flow.
Wealth management is a high level professional service that combines financial and
investment advice, accounting and tax service, retirement planning and also legal planning.
Client would work on single wealth manager who co-ordinates input from financial expert
and could include coordinator’s advice from client’s own attorney, accounts and insurance
agent. Wealth manager also provides service in banking sectors or philanthropic activities.
Ideally, Wealth management is investment advice service for an individual’s net worth.
Investment includes assets which produce regular income and gain in the form of capital.
It is widely accepted that primary objective of any management is to maximize the net value
of a Firm. This may be achieved by investing in projects that have greater returns on
investment. Choose a financial scheme that minimizes the hurdle rate and matches to the
duration of Asset being financed. In short, in order to generate wealth to an organization, they
must earn more than its cost of debt and equity capital i.e. shares.
The goal of wealth management is to sustain and grow long term wealth. The net worth
needed for qualifying wealth management service vary among the institution/individual.
Wealth management is more than just an adv ice. It comprises of all parts of individual’s
financial life. The idea is that rather than integrated pieces of advice and various products
from series of professional, high net worth individuals benefit from holistic approach in
which a single manager coordinates all the services needed to manage money and plan for
their own needs.

E.g. People who are directly employed with the firm known for investments may have more
knowledge in the marketing strategies, while those employed in a bank may focus on areas
such as management of trust, available credit options and overall estate planning.

There are certain essential components of wealth management system primarily mention as
1. A consultative process:
An adviser’s wealth management process must be consultative to enable them to gain
a detailed understanding of clients' goals and their most significant financial wants
and needs. A proper wealth management process is far more than a compliant
recommendation for a financial product. An industrialized wealth management
process involves counseling, challenging, educating, advising, and leading clients to
better manage their financial circumstances and/or more effectively develop the
opportunities in their financial lives. An obvious consequence is the development of
close and trusted relationships with clients, who then rely upon a firm over time as
their financial lives evolve.
2. Customized choices and solutions:
Wealth management advisers offer their clients solutions designed to fit the full range
of each client’s needs. These services might include several of the following:
investment management, insurance, estate planning, taxation, cash flow management,
debt management, leasing, stock brokering, superannuation, mortgages, banking,
charitable giving, financial structuring, gearing and specialist products.
3. Delivery in close consultation with your clients:
Wealth managers provide their services by working closely with clients on an
ongoing basis to identify their specific needs and how those needs change over time,
and design solutions around those needs. True wealth managers continue to help their
clients make smart decisions regarding their money over a period of time.
Wealth management breaks the familiar mould in which clients must contract with a
range of professionals, each specializing in a single area: the investment advisor
managing portfolios, the insurance agent selling life insurance, the accountant
handling taxes, and the lawyer taking care of estate planning. As their finances have
grown ever more complex, this compartmentalized approach has become less
appealing to clients wishing to streamline their affairs. There are certain methods of
wealth management. Following mention are the methods of wealth management:

1. Cash Value Added:

The Cash Value Added (CVA) model was developed by Ottoson (1996) and calculates
the value creation ability of a firm by taking into account only cash items:
CVA = Operating Cash Flow – Operating Cash Flow Demand
The sum of the Earnings before Depreciation Interest and Tax (EBDIT) adjusted for
non-cash charges, the working capital movements and nonstrategic investments gives
the Operating Cash Flow (OCF). The next step in the model requires the comparison
of the operating cash flow with a cash flow requirement, which is named Operating
Cash Flow Demand (OCFD). This OCFD represents the cash flow needed to meet the
company’s financial requirements on its strategic investments, i.e. the cost of capital.
The advantage of the CVA model is that it gives a very good estimate of the cash flow
generated above or below the company’s requirement for a given period. Furthermore,
the analysis can be accomplished at each level of the company. The total CVA for the
company is the aggregate CVA of its strategic investments. This methodology is a
cash flow measure that can be used for the performance evaluation of the firm over
time. Finally, it must be noted that the CVA measure is based on the idea that a
business must cover both the operating costs and the capital costs.

2. Cash Flow Return on Investment:

The Cash Flow Return on Investment (CFROI) was originally developed by Boston
Consulting Group and Holt Value Associates which is a subsidiary of Credit Suisse
First Boston. It is a wealth creation measure based on cash flows and not accounting
profits and is mainly used by portfolio managers and corporations. The rationale of
the index is that the current market price of a firm is associated mainly with the cash
flows from its operations and not from its net profits, and is calculated as follows:
CFROI = (Gross Cash Flow – Economic Depreciation) / Gross Investment (2) The
gross investment represents the existing assets of a firm and can be calculated by
adding to the net assets the accumulated depreciation and by making adjustments for
inflation to the book value. The gross cash flow is the sum of the after-tax operating
income and the depreciation and amortization. The economic depreciation is the
amount that has to be set aside to cover the expected replacement cost of the assets at
the end of their economic life. The cash flow return on investment is in essence the
internal rate of return, based on real cash flows and not earnings, which a firm
achieves for its existing investments (Damodaran, 2001). It is normally calculated on
an annual basis and is compared to an inflation-adjusted cost of capital to determine
whether a firm has produced returns greater that it’s cost of capital.
3. Economic Value Added:

The one measure that has received great attention in the academic financial literature
internationally is economic value added (EVA2). The EVA measure was developed by
Stern Stewart & Company and is based on the comparison between the profit a firm
creates and the capital charge it has incurred for creating this profit. In order for a firm
to have positive EVA it must have a positive economic spread, i.e. the difference
between the return on capital invested and the weighted average cost of capital. The
profit a firm creates is measured, within the framework of the EVA model, by the net
operating profit after tax (NOPAT).

4. Market Value Added:

The Market Value Added (MVA) measure is based on the assumption that the total
market value of a firm is the sum of the market value of its equity and the market
value of its debt. Stewart (1991) defines Market Value Added as the excess of
market value of capital (both debt and equity) over the book value of capital. In
another words MVA is the difference between the current market value of a firm
(V) and the capital contributed by its investors (K):
MVA = V – K

5. Refined Economic Value Added(REVA):

The refined economic value added (REVA) is an extension to the EVA
methodology, providing an analytical framework for evaluating corporate
performance in the context of shareholder value creation (Bacidore et al., 1997).
The current methodology uses market values for the firm's assets along with a
market-derived cost of capital. The rationale of the REVA is that since in the
calculation of EVA the capital charge for the firm is derived from a market-based
weighted average cost of capital then it is not appropriate to use the economic
book value of assets.
REVAt, = NOPATt – kw(MVt-1)

The definition of cash flow management for business could be summarized as keeping the
record or analyzing the net amount of cash received deducted from net cash expenses.
According to a study performed by Jesis Hagen of U.S Bank, 82% of businesses fail due to
poor cash management. If your business constantly spends more than it earns, you have a
cash flow problem. For small businesses, the most important aspect of cash flow management
is avoiding extended cash storage caused by creating too huge a gap between cash inflows
and outflows.
The official name for the cash flow statement is the statement of cash flows. The cash
flow statement (CFS) - a mandatory part of a company's financial reports since 1987 - records
the amount of cash and cash equivalents entering and leaving a company.

The cash flow statement includes only inflows and outflows of cash and cash
equivalents; it excludes transactions that do not directly affect cash receipts and payments.
These non-cash transactions include depreciation or write-offs on bad debts or credit losses to
name a few. Following are the statements shows cash flow statement is intended to

1. Provide information on a firm's liquidity and solvency and its ability to change cash
flows in future circumstances.
2. Provide additional information for evaluating changes in assets, liabilities and equity.
3. Improve the comparability of different firms' operating performance by eliminating
.the effects of different accounting methods.
4. Indicate the amount, timing and probability of future cash flows.

The cash flow statement has been adopted as a standard financial statement because it
eliminates allocations, which might be derived from different accounting methods, such as
various timeframes for depreciating fixed assets. Cash flow is the net change in your
company's cash position from one period to the next. If you take in more cash than you send
out, you have a positive cash flow. You have a negative cash flow if you have more cash
outflow than inflow. Cash flow is a key indicator of financial health. Following are the
certain important aspects of Cash flow statements:
Cash is King
The importance of strong cash flow is aptly stated in the common expression "cash is
king." The premise of this is that having cash puts you in a more stable position
with better buying power. While you can borrow money at times, cash affords you
greater protection against loan defaults or foreclosures. Cash flow is distinct from
cash position. Having cash on hand is critical, but cash flow indicates an ongoing
ability to generate and use cash.
Keeping Up With Debt
When you borrow money to buy buildings, equipment and inventory, you essentially
use future cash flow to make your purchases. Inherently, you need positive future cash
flow to pay for your debt commitments. Companies commonly have long-term loans
and short-term credit accounts with vendors. Each loan requires monthly payments.
The obligation to make these payments on an ongoing basis restricts your free cash
flow, which is money available to invest in growing your business.
Along with debt management, strong cash flow provides the comfort and capabilities
a business needs to invest in growth. Building new locations, investing in research
and development, renovating infrastructure, improving technology, providing more
training and purchasing more assets and inventory are among the ways your business
can grow and improve with strong positive cash flow. Getting to a position of excess
cash flow helps your company operate in a strategic, proactive way, rather than a
reactive, defensive way.
Cash flow also gives your business greater flexibility in responding to emerging
dilemmas or making critical decisions. Confidence in cash flow makes it easier to
make critical purchases in the near term rather than waiting. It also allows you to
disperse cash in the form of dividends to shareholders or owners. This strengthens the
bond between the company and its owners. Strong cash flow also makes your
business more appealing to a lender if you desire to take on new debt at some point.
You also have the ability to offer favorable credit terms to attract new buyers if you
are less desperate for cash.
Debt management is learning to live on a budget day by day, no matter the cause of your
debt. Debt management refers to an unofficial agreement with unsecured creditors for
repayment of debts over a specific time period, generally extending the amount of time over
which the debt will be paid back. Under debt management, the creditors are offered a
Statement of Affairs (SOA). Debt management plans help people decrease and eliminate
debt. The plans work best with "unsecured debt," or debts such as credit cards, bank
overdrafts and personal loans. "Secured debt," such as mortgages, rent and utility debts
cannot be included in a debt management plan.

Debt/Equity Ratio is a debt ratio used to measure a company's financial leverage, calculated
by dividing a company’s total liabilities by its stockholders' equity. The D/E ratio indicates
how much debt a company is using to finance its assets relative to the amount of value
represented in shareholders’ equity. The formula for calculating D/E ratios can be represented
in the following way:

Debt - Equity Ratio = Total Liabilities / Shareholders' Equity

The result may often be expressed as a number or as a percentage. This form of D/E may
often be referred to as risk or gearing. This ratio can be applied to personal financial
statements as well as corporate ones, in which case it is also known as the Personal
Debt/Equity Ratio. Here, “equity” refers not to the value of stakeholders’ shares but rather to
the difference between the total value of a corporation or individual’s assets and that
corporation or individual’s liabilities. The formula for this form of the D/E ratio, then, can be
represented as:

D/E = Total Liabilities / (Total Assets - Total Liabilities)

Debt-to-Equity Ratio has several variations. Most popular ones are as follows:

Debt-Equity Ratio1 =

Long-Term Debt
Debt-Equity Ratio2 =

Long-Term Debt
Debt-Equity Ratio3
Equity + Long-Term Debt

Objective of the Study:

Whenever we come across the word Wealth Management it appears to an investor as
something coming down from the Planet Mars. But if we analyze the basics without getting
too much within the complicated jargon we find 2 things primarily, First Proper Asset
allocation and another Risk control. Apart from them one can find many more things within
wealth management. But in all definitions we find the above 2 basic meanings behind the
objective of wealth management. The things offered within the meaning of Wealth
management are Investment planning which assists you in investing your money into various
investment markets, keeping in mind your investment goals. Insurance planning assists you in
selecting from various types of insurances, self insurance options and captive insurance
companies. Retirement planning is critical to understand how much funds you require in your
old age. Asset protection begins with your financial advisor trying to understand your
preferred lifestyle and then helping you deal with threats, such as taxes, volatility, inflation,
Monitoring the cash situation of any business is the key. The income statement would reflect
the profits but does not give any indication of the cash components. The important
information of what the business has been doing with the cash is provided by the cash flow
statement. Like the other financial statements, the cash flow statement is also usually drawn
up annually, but can be drawn up more often. It is noteworthy that cash flow statement covers
the flows of cash over a period of time (unlike the balance sheet that provides a snapshot of
the business at a particular date). Also, the cash flow statement can be drawn up in a budget
form and later compared to actual figures. Following are the basic objective of cash flow:
 Cash flow statement shows inflow and outflow of cash and cash equivalents from
various activities of a company during a specific period under the main heads i.e.,
operating activities, investing activities and financing activities.
 Information through the Cash Flow statement is useful in assessing the ability of any
enterprise to generate cash and cash equivalents and the needs of the enterprise to
utilize those cash flows.
 Taking economic decisions requires an evaluation of the ability of an enterprise to
generate cash and cash equivalents, which is provided by the cash flow statement.
 Cash and cash equivalents are generally consists of Cash in hand, cash at bank, short
term investments that are highly liquid, Bank overdrafts that are comprise the integral
element of an organization’s treasure management.

Research Methodology:
Secondary Data: Data is collected through websites of various companies like satyam.
Cash flow from financing activities (CFF) shows the cash flows arising from changes in the
capital of the enterprise, and its financing structure. It registered positive values when he
turned to external sources of funding to supplement the results from operations. Cash flow
from financing activities recorded negative values due to payments on debt (repayment of
loans, financial lease payment obligations, payment of interest), Or reduction of capital
(capital repayment to shareholders). In this case payments will be made most likely in cash
flow from operating activities. Sum of the three components of cash flow situation is equal to
net cash flow:
CFF + CFI CFE + Cash Flow = Net Cash Flow Net.
It can record the following situations:
- Net cash flow > 0, reflecting cash exceeding their activity which is generated by an
additional source of internal growth through self-financing.
- Net cash flow = 0, in which case ensure a balance between receipts and payments
- Net cash flow.

Cash flow from investment activity (IFC) expresses the degree to which these activities were
self-financed and the possibility that the amounts allocated to the investments to generate
future positive cash flows in the future. It recorded revenues dotorita positive values higher
than payments for investment. Such a situation may indicate an intention to restructure the
company's activity or who disponibilizeaza assets that the company is the beneficiary of large
commercial loans granted to suppliers of property. Negative values can achieve when it is
important investments whose value is only partially offset the recovery of property.

Data Analysis:
Cash surplus from operating activities, which is interpreted positively, can be generated
through depreciation
There are two principal tools for the cash flow statement analysis, first is preliminary analysis
and second is ratio analysis. The preliminary analysis usually includes evaluation of the signs
of cash flow from operating, investing and financing activities, and sometimes also a vertical
and horizontal analysis of the cash flow statement. Positive cash surplus from investing
activities can be negatively / wrongly interpreted if it results from selling fixed assets, i.e.
limiting company’s potential to repay financial liabilities or liquidating operating expenses.

For example, we consider case study negative / wrong interpretation of cash surplus.

Satyam Computers were once the crown jewel of Indian IT industry, but were brought to the
ground by its founders in 2009 as a result of financial crime. The untimely demise of Satyam
raised a debate about the role of CEO in driving a company to the heights of success and its
relation with the board members and core committees. The scam brought to the light the role
of corporate governance (CG) in shaping the protocols related to the working of audit
committees and duties of board members.
The main objective of this study is to highlight the Satyam Computer Services Limited‘s
accounting scandal by
portraying the emergence of Satyam, sequence of events, key players involved in the scam
process, anatomy of
Satyam fraud, the aftermath of events, auditor’s role, major follow-up actions, regulatory
reforms undertaken in India, etc. This study is primarily based on ―secondary sources of
data, and the nature of the study is descriptive and analytical. Best possible efforts have made
by the author to provide the latest evidence supporting the case.
The Satyam Computer Services Limited (hereinafter, Satyam‘), a global IT company based in
India, has just been added to a notorious list of companies involved in fraudulent financial
activities. Satyam‘s CEO, Mr. Ramalingam Raju, took responsibility for all the accounting
improprieties that overstated the company‘s revenues and profits, and reported a cash holding
of approximately $1.04 billion that simply did not exist.
The fraud took place to divert company funds into real-estate investment, keep high earnings
per share, raise executive compensation, and make huge profits by selling stake at inflated
price. In this context, Kripalani (2009) stated, ―The gap in the balance sheet had arisen
purely on account of inflated profits over a period that lasted several years starting in April
1999.‖ ―What accounted as a marginal gap between actual operating profit and the one
reflected in the books of accounts continued to grow over the years. This gap reached
unmanageable proportions as company operations grew significantly,‖ Ragu explained in his
letter to the board and shareholders. He went on to explain, every attempt to eliminate the gap
failed, and the aborted Maytas acquisition deal was the last attempt to fill the fictitious assets
with real ones. But the investors thought it was a brazen attempt to siphon cash out of

The vertical and horizontal analysis of financial statements is essential at the stage of the so-
called reading of the financial statements that enables a preliminary assessment of the
company’s / individuals financial situation. It is based, respectively, on an analysis of the
structure (individual items of financial statement are expressed as percentages of a base
figure to show the relative significance of the items) and an analysis of the dynamics (i.e. an
analysis of the percentage changes in individual items of financial statement over time).
However, it can be noticed that the vertical and horizontal analysis of the cash flow statement
is relatively rarely discussed in the literature, in contrast to the vertical and horizontal
analysis of the balance sheet and income statement. The theoretical discussions on the
analysis of cash flow statement are often limited to the analysis of the signs of cash flow from
operating, investing and financing activities, then going straight to the ratio analysis.
Naturally, the question arises, how to conduct vertical analysis of the cash flow statement,
especially if it is presented using the indirect method.
The goal of the analysis of cash flow statement is to analyze cash inflows and
outflows in order to conduct a percentage contribution of cash flows from all three activities
i.e. first is financing activity (positive or negative net cash flow from operating activities),
second is investing activity (cash inflows in the investing section received from the sale of
assets used in ongoing operations or from the sale of investment assets), third is financing
activity (financing activities related to long-term funds or capital). In the case of the
horizontal analysis of the cash flow statement it was concluded that such an analysis allows
evaluating trends in changes of individual items over time. This is done to show separately
the cash flows generated / used by these activities, thereby helping to assess the impact of
these activities on the financial position and cash and cash equivalents of an enterprise.
Following are the certain cash flow examples for the particular industry

Apparel, Footwear & Accessories Industry 2Q 1Q 4Q 3Q 2Q

2017 2017 2016 2016

5.03 -0.75 2.64 5.22 3.32

Y / Y Revenue Quarterly Growth
% % % % %
0.82 -11.15 -0.17 15.37 -2.99
Seq. Revenue Quarterly Growth
% % % % %
Overall Ranking Y/Y # 45 #0 # 82 # 75 # 44
Y / Y Revenue Annual Growth (at the 4.19
end of Fiscal Year) %
Y / Y Revenue Growth (Annual by 5.12 4.19 14.01
1.97 % 4.3 %
Quarter Ending) % % %
Seq. Revenue Growth (Annual by 1.04 -0.59 0.12 1.72 -0.27
Quarter Ending) % % % % %
Overall Ranking Y/Y (Annual) # 61 # 66 # 47 # 45 # 36

Hotels & Leisure Industry 2Q 1Q 4Q 3Q 2Q

2017 2017 FY 2016 2016 2016

-4.13 -3.74 -28.14 -14.65 1.84

Y / Y Revenue Quarterly Growth
% % % % %
42.34 -29.51 -7.12 6.45
Seq. Revenue Quarterly Growth 6.94 %
% % % %
Overall Ranking Y/Y # 93 # 88 # 99 # 93 # 53
Y / Y Revenue Annual Growth (at -9.52
the end of Fiscal Year) %
Y / Y Revenue Growth (Annual by -12.76 -10.56 -9.52 -0.01 16.51
Quarter Ending) % % % % %
Seq. Revenue Growth (Annual by -0.8 % -1.02 -9 % -3.65 0.69
Quarter Ending) % % %
Overall Ranking Y/Y (Annual) # 97 # 91 # 86 # 59 # 32

In case of debt management, there are certain ways for redemption of debt of an
organization. Refunding is one of the techniques for entire repayment of debt of an
organization. Issuing new bonds, government bonds and securities are the repayment modes
of loans. In this repayment, short-term securities are replaced by issuing long-term securities.
Surplus budget is another concept of (i.e., by spending less than the public revenue obtained)
may be utilized for clearing off public debts. But in recent years due to ever-increasing public
expenditures, surplus budget is a rare phenomenon. Heavy taxes have to be imposed for
realizing a surplus budget, which may have dire consequences. Or, when public expenditure
is reduced for creating a surplus budget, a deflationary bias may develop in the economy.
Capital levy is strongly recommended by Dalton as a method of debt redemption with the
least real burden on the society. Capital levy refers to a very heavy tax on property and
wealth. It is once- for-all tax on the capital assets and estates. The redemption of external
debt, however, is possible only through an accumulation of foreign exchange reserves. This
necessitates creation of a favorable balance of payments by the debtor country by augmenting
its exports and curbing its imports, thereby improving the position of its trade balance. Thus,
the debtor country has to concentrate on the expansion of its export sector industries. Further,
loans raised must be productively utilized, so that they may become self-liquidating, posing
no real burden on the economy. In underdeveloped countries like India, where external debt
has increased tremendously, it is necessary that its burden is reduced by changing the terms of
repayment or by rescheduling the debts.

 Through the cash flow statement alone, it is not possible to arrive at actual P&L of the
company as it shows only the cash position. It has limited usage and in isolation it is
of no use and requires BL, P&L for its projections. Cash flow statement does not
disclose net income from operations. Therefore, it cannot be a substitute for income
 The cash balance as shown by the cash flow statement may not represent the real
liquidity position of the business because it can be easily influenced by postponing the
purchases and other payments
 Cash flow statement cannot replace the funds flow statement. Each of the two has a
separate function to perform.

Based on the conducted analysis it can be concluded that the traditional cash flow analysis is
limited to the vertical analysis of net cash flow from three levels of activities and, more
rarely, to ratio analysis based on these three net cash flows. Such an analysis can lead to
erroneous conclusions about the company due to:
 High volatility of net cash flow from operating, investing and financing activities
 Different nature of the factors affecting the net cash flow (continuous and recurring
events or one-time events)
 Postponement of payments separated from the time in which revenues and expenses
are recorded (accordance with the accrual basis principle).
The analysis of the most important part of the cash flow statement, i.e. cash flow from
operating activity, should be deepened especially to identify and alternatively eliminate the
influence of:
 Changes in working capital.
 Taxes.
 One-off events, in particular non-operating transactions, affecting the difference
between net income and cash flow from operating activity.
The analysis of investing activity should be made separately for capital expenditures
(purchase or sell out fixed assets) and for speculative investments. Then the analysis of the
financial part of the cash flow statement should be made separately for equity and debt.