This document discusses cash flow and long term financial metrics. It begins by explaining why cash flow is important for ensuring a company's long-term viability and ability to make strategic investments. It then covers the statement of cash flows and its three sections - operating, investing, and financing activities. Finally, it discusses free cash flow and how companies can use it, as well as examples of long term financial metrics that can help companies assess whether they are achieving their strategic goals.

1. Cash Flow & Long Term
Financial Metrics
Nicholas Salmanowicz & Veronica Wittek, 3M
3M Confidential

2. Agenda
Why cash flow is
important
Statement of Cash
Flows
Free Cash Flow (FCF)
and FCF Conversion
Long Term Financial
Metrics

3. Definition: Cash Flow
 A revenue or expense stream that changes
a cash account over a given period. Cash
inflows usually arise from one of three
activities - financing, operations or investing
- although this also occurs as a result of
donations or gifts in the case of personal
finance. Cash outflows result from expenses
or investments.

4. Why cash flow is important
 Managing cash flows helps ensure long-term
viability
 Ensures liquidity exists when times get tough
 Allows for the freedom to make investment decisions
that will benefit the company
 Companies can show increases in earnings not
related to cash
“All we care about is how much cash a business
is likely to produce between now and judgment day”
-Warren Buffet

5. Income Statement Versus Cash Flow
September Income Statement
 Differences can
Revenue 1,000 include:
 Cash received for
Expenses 750
sales vs. AR
Operating Income 250
balance
 Expenses paid vs.
September Cash Impact
AP balance
Revenue 800  Accruals
Actual Cash Expenses 375  Depreciation
Operating Income 425

6. Why cash flow is important
Market Comments – Cash Management is Valued
 “We expect cash generation to be a key driver of …
performance among the best-in-class industrials.” Goldman
Sachs
 The flight to quality mindset that caused banks’ flight to cash
has also translated into the equity world as a demand
increases for companies with proven cash flows Credit
Suisse
 … companies with strong balance sheets, free cash flow, and
trustworthy management will do much better in this market.
Integrity as a whole will be a commodity in the coming years
as distrust in the system permeates. Market Watch
 “Four of the top five fund managers list strong cash flows and
clean balance sheets among the most important stock
investment criteria” Fortune
Cash Remains King

7. Agenda
Why cash flow is
important
Statement of Cash
Flows
Free Cash Flow (FCF)
and FCF Conversion
Long Term Financial
Metrics

8. Statement of Cash Flows
Purpose – Cash in, Cash out
Three Sections
1. Operating activities
2. Investing activities
3. Financing activities

9. Operating Activities
Two methods of reporting
Operating Section
1. Direct
• Shows actual cash disbursements and receipts
• Only used by 3% of companies
2. Indirect
• Net Income is adjusted for cash and non-cash
transactions (Accruals, Deferrals,
Depreciation/Amortization)
• Most common approach among larger
businesses

10. Operating Activities
 Cash generated by normal business
operations
 Changes in inventory, accounts payable,
accounts receivable balances
 Impact of depreciation
 Impact of prepaid or deferred expenses

11. Operating Activities
Cash from operations
Asset/Liability change reference
Category Balance Sheet Change Cash Flow Impact
Asset
Asset
Liability
Liability

12. Investing & Financing Activities
Investing Cash Flows:
 Purchases and sales of fixed assets and
software
 Cash activity from selling or acquiring
business
 Cash used or received from the sale or
purchase of investments or marketable
securities
Financing Cash Flows:
 Cash activity from borrowing or retiring
debt

13. Company ABC
Consolidated Statement of Cash Flows
2011 2012 Change
Cash Flows from Operating Activities
Increase/(Decrease) in Net Assets (1,920) 345 2,265
Adjustements to reconcile change in Net Assets
Depreciation 86 77 (9)
(Increase)/Decrease in contracts and grant receivables 1,194 (1,901) (3,095)
(Increase)/Decrease in prepaid expenses (5) 0 6
(Increase)/Decrease in deferred assets 35 - (35)
Increase/(Decrease) in account payable and accrued expenses 92 2,079 1,987
Net Cash flows provided by Operating Activities (518) 599 1,118
Cash Flows from Investing Activities
Fixed Asset purchases (14) (3) 11
Net Cash flows provided/(used) by investing activities (14) (3) 11
Cash flows from financing activities
Net cash flows provided/(used) by financing activities (751) (321) 430
Net Change in cash and equivalents
Net Increase/(Decrease) in cash (1,283) 596 1,880
Cash and equivalents, beginning of fiscal year 2,148 1,530 (618)
Cash and equivalents, end of fiscal year 865 2,126 1,261

14. Agenda
Why cash flow is
important
Statement of Cash
Flows
Free Cash Flow (FCF)
and FCF Conversion
Long Term Financial
Metrics

15. Free Cash Flow
• Cash From Operations Is Not Enough
Fails to account for the cash a company must spend to
replace its capital investments as they depreciate
• Free Cash Flow is the remaining funds after paying
out all operating expenses and replenishing
factories/equipment/etc. as they wear out

16. Free Cash Flow
Strong Free Cash Flow Provides Opportunities
Free Cash Flow
Additional Net Debt &
Special Projects
Contributions Investments
Retirement
Maintenance
Benefits
Strong Free Cash Flow: Essential to Strategy & Future Opportunities

17. Key Takeaways
Ways to improve cash flow
 Improve Operating Income
• Create efficiencies/ eliminate Low Value added tasks
• Ensure over the long term Revenues grow at a faster
rate than costs. (Effective Cost control).
 Reduce Operating Capital Costs
• Use equipment and machinery more effectively
• Eliminate unnecessary assets
 Reduce working capital
• Reduce inventories where appropriate while still
meeting customer needs
• Reduce customer terms where appropriate to
accelerate receivables
• Negotiate longer payable terms where appropriate

18. Agenda
Why cash flow is
important
Statement of Cash
Flows
Free Cash Flow (FCF)
and FCF Conversion
Long Term Financial
Metrics

19. Long Term Financial Metrics
 Every company, for profit and not for profit, has a
mission, vision and overall strategies
 How do you measure your success on these
strategies?
 Financial metrics and tools help you determine
whether or not you are reaching your goals and
strategies
 Long Term Financial Metrics are tools to help you
assess the status of your overall strategies
 This can be done on a quarterly basis or annual basis
 Comparing to other companies in your industry

20. Long Term Financial Metrics: Examples
 Tracking Event Increases/Revenue Growth
 ROI/ROA
 Expenses to Revenue – should be ~1x or less
 Asset Use
 AR Turns: Sales/AR
 Days Sales Receivable: 365/Receivable Turnover
 Short Term
 Current Ratio: (Current Assets/Current Liab)
 Long Term
 Cash Coverage: (EBIT + Depreciation)/Interest
 # of months cash on hand
 Surplus/Deficit as a % expenses

21. Thank you!