Projecting the Cash Flow Statement

  • Peter Lynch

This video explains how to project the cash flow statement in an LBO model built in Excel. The sequence required to project each line item is identical to the sequence laid out in the Integrating Financial Statements video series (which is focused on a three-statement model) and the LBO video series, so we will not explore that in detail. Instead this video will provide shortcuts to move through the process faster when you are working with new financial statements, and visuals to help communicate how the income statement and balance sheet link to the cash flow statement.

Projecting the Cash Flow Statement:

  1. Copy / Paste Line Items: To move faster through the process, it can help to copy the line items from the target company’s financial statements, and then paste them into your financial model.
  2. Link to Net Income: The cash flow statement starts with net income, which pulls from the income statement.
  3. Make Adjustments for Non-Cash Items: In most simple models this will require adding back depreciation and amortization at the very least.
  4. Make Adjustments for Working Capital: As a helpful rule, when a current asset increases it consumes cash, and when a current liability increases it creates cash.
  5. Cash Flow From Investing Activities: In this model only capital expenditures are included under CFI. This should be included as a cash outflow.
  6. Cash Flow From Financing Activities: The debt schedule will be addressed as the final item in this process. It is not included in this video.
  7. Calculate Cash: Sum cash flow from operations, cash flow from investing activities and cash flow from financing activities to arrive at cash flow for the period. This sum is then added to the previous periods cash balance to arrive at the current period’s cash balance.