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Corporate Finance Theory and Practice, Third Edition by Antonio Salvi, Yann Le Fur, Maurizio Dallocchio, Pascal Quiry

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Chapter 2

CASH FLOW

Let's work from A to Z (unless it turns out to be Z to A!)

In the introduction, we emphasised the importance of cash flows as the basic building block of securities. Likewise, we need to start our study of corporate finance by analysing company cash flows.

CLASSIFYING COMPANY CASH FLOWS

Let's consider, for example, the monthly account statement that individual customers receive from their bank. It is presented as a series of lines showing the various inflows and outflows of money on precise dates and in some cases the type of transaction (deposit of cheques, for instance).

Our first step is to trace the rationale for each of the entries on the statement, which could be everyday purchases, payment of a salary, automatic transfers, loan repayments or the receipt of bond coupons, to mention but a few examples.

The corresponding task for a financial manager is to reclassify company cash flows by category to draw up a cash flow document that can be used to:

  • analyse past trends in cash flow (the document put together is generally known as a cash flow statement1); or
  • project future trends in cash flow, over a shorter or longer period (the document needed is a cash flow budget or plan).

With this goal in mind, we will now demonstrate that cash flows can be classified into one of the following processes:

  • Activities that form part of the industrial and commercial life of a company:
    • operating cycle;
    • investment cycle.
  • Financing activities to fund these cycles:

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