Cash flow, financial

No single value for a profitability estimate should be accepted without further consideration. An inteUigent consideration of the cumula-tive-cash-flow and cumulative-discounted-cash-flow curves such as those shown in Fig. 9-10, together with experience and good judgment, is the best way of assessing the financial merit of aprojec t. 

Now that you have determined the likely savings in terms of annual process and waste-treatment operating costs associated with each option, consider the necessary investment required to implement each option. Investment can be assessed by looking at the payback period for each option that is, the time taken for a project to recover its financial outlay. A more detailed investment analysis may involve an assessment of the internal rate of return (IRR) and net present value (NPV) of the investment based on discounted cash flows. An analysis of investment risk allows you to rank the options identified. 

Finally, let s consider cash flow. Although cash flow does not have a direct effect on a company s revenues or expenses, the concept must be considered. If the project involves procurement costs, they often must be paid upon delivery of the equipment - yet cash recovery could take many months or even years. Three things about any project can affect a firm s available cash. First, cash is used at the time of purchase. Second, it takes time to realize financial returns from the project, through either enhanced revenues or decreased expenses. Depreciation expense is calculated at a much slower rate than the cash was spent. As a result of the investment, a company could find itself cash-poor. Even though cash flow does not directly affect revenues and expenses, it may be necessary to consider. 

Any presentation to the organization s senior management, besides giving the technical details, should include a financial appraisal, which could be on a simple payback basis. However, other methods are available, such as return on capital employed and discounted cash flow (DCF). 

To distinguish between cash flows and earnings, let us look at a grossly simplified set of financial statements for a company. The three statements are a... 

For the accumulated costs and resources devoted to the development of a new chemical entity (NCE) or new molecular entity (NME) to make sense financially, the commercial potential of the compound must be evaluated in a rigorous manner. Compounds whose expected financial performance does not warrant these high investment costs must be abandoned or out-licensed as soon as possible so as to direct resources toward more profitable endeavors. By operating effectively, a well-designed drug discovery and development process can focus its efforts to operate efficiently on the compounds that will maximize cash flow to the pharmaceutical firm. 

To the remaining companies, we applied Merrill Lynch s Cash Realization Test. We eliminated companies that reported financial net income that materially exceeded cash flow from operations. Companies eliminated 7 — Companies remaining 62... 

Explanations and details of these terms can be obtained in various books and pamphlets, for instance, Allen (1980) and Liversey (1983). No one parameter is self-sufficient, and alone gives a complete view of the financial status of a project or product. Therefore a number of parameters are usually calculated, and used in conjunction. They serve to give indications of how to minimise the period over which capital needs to be committed to a specific project, to show changes in the cost-structure of the process with time, and to reduce the time taken to convert the material, labour and overhead resources (the working capital) into cash in the form of profits from sales. That is, to make the cash-flow as favourable as possible. Each comparer will have different criteria as to what constitutes an acceptable financial risk when evaluating a project. Obviously healthcare product/pharmaceutical companies have quite different criteria to companies manufacturing bulk chemicals. 

Cash flow statements are the easiest of the three main financial statements to understand because they are just like a checkbook. The amount of money coming in, less the amount of money going out, equals the net increase or decrease in cash from all sources. 

The chapter considered the engineer s fear of financials and attempted to overcome it with a straightforward discussion of cash flow, income, and balance statements. The mathematics of these statements is simple arithmetic, but the confusion seems to come from not understanding a few key terms. The chapter also considered the utility of ratio analysis—what engineers might call dimensional analysis for companies—breakeven analysis, and the basics of the time value of money. Although a full discussion was beyond the scope of this chapter, the discussion served up the basics and may also serve to introduce more careful treatments in other courses or texts. 

An advantage of small water treatment companies is that, generally, they have the ability to minimize corporate bureaucracy and respond very quickly to customers needs. They often have a higher percentage of more experienced, motivated, and entrepreneurial people within their total numbers of staff. They just have less staff overall. Small companies may be limited when trying to handle multisite accounts or where considerable financial resources or cash flow is required. 

If a review of your net worth suggests something needs to be done to improve your financial situation, the best way to understand the problem is to compare what you earn to what you spend. This is called a cash flow analysis. It gets to the basic question of how much of your income is spent on debt service, consumption, and savings. It also answers the question of how much more you are spending than you have coming in—or vice versa. 

The exit by disposal of Messer Griesheim to strategic buyers and the partial Celanese IPO in the USA are successes with above-average returns. Recapitalizations due to strong operational cash flows and the availability of debt have also been successful for example, the recapitalization of Cognis has returned more than the money originally invested, although the financial sponsors still own it entirely. 

Financial sponsors place heavy emphasis on strategy and operations, and getting these two right can lead to performance improvements and cash flow acceleration. These are usually rewarded by incentive systems for management teams and are supported by powerful implementation principles. 

LBO financings require a healthy cash flow for interest payments and repayments of debt tranches. The net debt position also determines the equity value that can be realized for financial sponsors on exit. The two major levers for improved cash flow management are working capital management and a disciplined capital expenditure program. 

Accounting Keep the books Record financial transactions Prepare financial statements Manage cash flows Analysis of profitability... 

The three financial reports that are essential to the operation of any organization are the balance sheet, the income statement, and the statement of cash flows (Table 15-1). Please note that several other types of financial... 

Budgeted financial statements, often called pro forma financial statements, show how the pharmacy organization s financial statements will appear at a specified time if operations proceed according to plan. Budgeted financial statements include a budgeted income statement, a budgeted balance sheet, and a budgeted statement of cash flows. 

There are early warning signs that the partnership between the sponsor and vendor may be changing. A continued inability to meet deadlines, incomplete reports to the sponsor, and modification of the financial terms in the favor of cash flow to the vendor without increased services to the sponsor are examples of such warning signs. When dealt with quickly, these issues generally do not recur. If left to fate, they can destroy the partnership and put projects in jeopardy. 

In order to carry out a proper financial appraisal, the net cash flow figures must be calculated as inputs to the project s funds for each year of its operating life. Although these sums actually arise throughout the year, they are conventionally taken as arising on the last day of the year. 

---