#FinanceMaster’s Post

Is Your Cash Flow Statement Direct or Indirect? (by Oana Labes, MBA, CPA) --- 💎If you enjoy this, you will love her weekly newsletter! Join 40,000+ subscribers and get Saturday strategic finance insights and cheat sheets as a welcome gift: https://bit.ly/3T3CtPm --- Cash flow statements have three main sections: ➡️ Operating cash flows / Cash flow from operations ➡️ Investing cash flows / Cash flows from investing ➡️ Financing cash flows / Cash flows from financing ⚫ The only difference between the direct and indirect cash flow statements is how you calculate 𝐨𝐩𝐞𝐫𝐚𝐭𝐢𝐧𝐠 𝐜𝐚𝐬𝐡 𝐟𝐥𝐨𝐰𝐬. 1️⃣ 𝐇𝐞𝐫𝐞'𝐬 𝐡𝐨𝐰 𝐭𝐨 𝐜𝐚𝐥𝐜𝐮𝐥𝐚𝐭𝐞 𝐨𝐩𝐞𝐫𝐚𝐭𝐢𝐧𝐠 𝐜𝐚𝐬𝐡 𝐟𝐥𝐨𝐰𝐬 𝐢𝐧 𝐭𝐡𝐞 𝐢𝐧𝐝𝐢𝐫𝐞𝐜𝐭 𝐦𝐞𝐭𝐡𝐨𝐝: ✔️ start with net income from the Income Statement, which has been reported using accrual accounting ✔️ because your accrual income statement recognized revenues and expenses when they were incurred, not when they were settled, they need to be de-accrued to convert them into cash ✔️make adjustments for non-cash transactions such as depreciation and amortization, share-based compensation, gains or losses from the sale of fixed assets or investments ✔️ make adjustments for non-operating items considered in the other two sections of the cash flow statement (e.g., dividend payments received potentially included in investing cash flows) ✔️ make adjustments for changes in current assets and current liabilities (receivables, payables, inventories, prepaid, accruals) 2️⃣ 𝐇𝐞𝐫𝐞'𝐬 𝐡𝐨𝐰 𝐭𝐨 𝐜𝐚𝐥𝐜𝐮𝐥𝐚𝐭𝐞 𝐨𝐩𝐞𝐫𝐚𝐭𝐢𝐧𝐠 𝐜𝐚𝐬𝐡 𝐟𝐥𝐨𝐰𝐬 𝐢𝐧 𝐭𝐡𝐞 𝐝𝐢𝐫𝐞𝐜𝐭 𝐦𝐞𝐭𝐡𝐨𝐝: ✔️ directly net the cash collections and disbursements during the period ✔️ instead of reconciling the accrual income statement, directly consider cash-based inflows and outflows from operations ✔️ add: ▪️net cash from customers ▪️cash paid to employees ▪️cash paid to suppliers ▪️cash paid for interest ▪️cash paid for taxes 🎯 Remember: ⚫ Accounting frameworks offer a choice between the indirect and the direct method. ⚫ Investors and analysts frequently prefer the direct method >>provides more transparency into company cash flows and shows actual cash received and paid out during the period. ⚫ Most companies, however, choose the indirect method >> faster to get access to required information, and easier to put together. 🎯 This is an excerpt from my 5⭐ rated Cash Flow Masterclass. Learn cash flow strategy in less than 2 hours, bit-size lessons, and lifetime access. Check out the Executive Edition for a more streamlined curriculum. ➡️ What would you add? ---------- Enroll in our LinkedIn Learning course "Driving business impact for finance professionals" here: https://bit.ly/4a5fB9l Learn more about the latest trends in finance and accounting by listening to the FinanceMaster Podcast here: https://bit.ly/3NLSt73 Or download guides and cheat sheets about finance and accounting here: https://lnkd.in/eC_zuCU4

FCF vs EBITDA, Visualized 🖼️ Accounting is the language of business. Today, let's demystify two essential accounting terms: FCF & EBITDA. 💰 FCF Stands for Free Cash Flow It is the cash a company generates after accounting for cash outflows to support operations and maintain its capital assets. 💰 EBITDA Stands for: Earnings Before Interest, Taxes, Depreciation, and Amortization It is often used to evaluate a company's operating performance. It focuses on the business's core operations, excluding the effects of financing and accounting decisions. 💡PURPOSE → FCF: reveals how much cash is available for dividends, debt repayment, and reinvestment after covering all expenses, including CapEx. → EBITDA: provides a view of a company's operational efficiency by excluding non-operating expenses. 🎢 USAGE → FCF is crucial for assessing a company's ability to generate cash and fund growth, repurchase stock, pay dividends, and reduce debt. → EBITDA is often used by investors to compare companies within the same industry without the effects of financing and accounting decisions. 🔢 CALCULATION FCF ➡ Cash Flow From Operations - Capital Expenditures EBITDA ➡ Operating Income + Depreciation + Amortization Each metric serves a unique purpose in financial analysis, and each offers valuable insights for investors, managers, and stakeholders. Was this explanation helpful?

This is yet another insightful post to ponder over. Both the direct and indirect methods arrive at the same information. The difference is in the journey. From the looks of it, the direct method seems easier. However, to me, the indirect would be more professional. For instance, retail investors or “laymen” would prefer the direct method. This communicates where the cash is being received from and paid out. In addition, retail investors usually would not be well-versed with accounting terminology and jargon. Plus, they would prefer something easy to understand and comprehend. Coming to accounting professionals or C-Suite executives, the latter is deemed preferable.

Accounting Ratios Accounting ratios are numerical values derived from a business's financial statements. They are used to evaluate various aspects of a company's financial stability, performance, and liquidity. Here are some common categories of accounting ratios: Liquidity Ratios: These measure a company's ability to meet its short-term obligations. Examples include: Current Ratio: Total current assets divided by total current liabilities. Quick Ratio (or Acid-test Ratio): (Total current assets minus inventory) divided by total current liabilities. Solvency Ratios: These assess a company's capacity to sustain operations indefinitely by examining its debt levels in relation to its assets and equity. Examples include: Debt to Equity Ratio: Total liabilities divided by shareholders' equity. Debt to Asset Ratio: Total liabilities divided by total assets. Profitability Ratios: These evaluate how effectively a company can generate profit relative to sales, assets, or equity. Examples include: Gross Profit Margin: (Sales minus the cost of goods sold) divided by sales. Return on Assets (ROA): Net income divided by total assets. Return on Equity (ROE): Net income divided by shareholders' equity. Efficiency Ratios: These ratios measure how effectively a company uses its assets and manages its operations. Examples include: Asset Turnover Ratio: Sales divided by average total assets. Inventory Turnover Ratio: Cost of goods sold divided by average inventory. Market Value Ratios: These provide insight into how investors view the company’s financial health and future performance. Examples include: Price to Earnings Ratio (P/E): Market price per share divided by earnings per share. Dividend Yield: Annual dividends per share divided by the price per share. These ratios are essential tools for investors, creditors, and company management to make informed financial decisions and assess the health of the business.

Cash Flow Statement

EBITDA vs FCF, Visualized Accounting is the language of business. Today, let's demystify two essential accounting terms: EBITDA and FCF. 💰 EBITDA Stands for: Earnings Before Interest, Taxes, Depreciation, and Amortization It is often used to evaluate a company's operating performance. It focuses on the business's core operations, excluding the effects of financing and accounting decisions. 💰 FCF Stands for Free Cash Flow It is the cash a company generates after accounting for cash outflows to support operations and maintain its capital assets. 💡PURPOSE → EBITDA: provides a view of a company's operational efficiency by excluding non-operating expenses. → FCF: reveals how much cash is available for dividends, debt repayment, and reinvestment after covering all expenses, including CapEx. 🎢 USAGE → EBITDA is often used by investors to compare companies within the same industry without the effects of financing and accounting decisions. → FCF is crucial for assessing a company's ability to generate cash and fund growth, repurchase stock, pay dividends, and reduce debt. 🔢 CALCULATION EBITDA ➡ Operating Income + Depreciation + Amortization FCF ➡ Cash Flow From Operations - Capital Expenditures Each metric serves a unique purpose in financial analysis and each offers valuable insights for investors, managers, and stakeholders.

EBITDA vs FCF, Visualized Accounting is the language of business. Today, let's demystify two essential accounting terms: EBITDA and FCF. 💰 EBITDA Stands for: Earnings Before Interest, Taxes, Depreciation, and Amortization It is often used to evaluate a company's operating performance. It focuses on the business's core operations, excluding the effects of financing and accounting decisions. 💰 FCF Stands for Free Cash Flow It is the cash a company generates after accounting for cash outflows to support operations and maintain its capital assets. 💡PURPOSE → EBITDA: provides a view of a company's operational efficiency by excluding non-operating expenses. → FCF: reveals how much cash is available for dividends, debt repayment, and reinvestment after covering all expenses, including CapEx. 🎢 USAGE → EBITDA is often used by investors to compare companies within the same industry without the effects of financing and accounting decisions. → FCF is crucial for assessing a company's ability to generate cash and fund growth, repurchase stock, pay dividends, and reduce debt. 🔢 CALCULATION EBITDA ➡ Operating Income + Depreciation + Amortization FCF ➡ Cash Flow From Operations - Capital Expenditures Each metric serves a unique purpose in financial analysis and each offers valuable insights for investors, managers, and stakeholders. Was this explanation helpful? Let me know in the comments below! *** P.S. Want to level up your investing skills? Join me for a FREE webinar TODAY (Wed, Feb 14th) at 12:00 noon EST. Topic: 10 Metrics Every Investor Must Know RSVP here: https://lnkd.in/eDeSEXjM If you found this post useful, please share (repost ♻️) to help make LinkedIn a better platform for all.

This is an excellent graphic explaining the difference between EBITA and free cash flow. In my experience inexperienced managers often struggle with basic financial acumen and easy to understand teaching tools like this really help simplify concepts. Excellent