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Examples of company cash flows and how they relate to strategies

Table 8.10 shows an example of a published US statement of cash flows for H J Heinz, the company taken private in 2012 by Warren Buffet.

The first thing which literally hits you is that there is an overdose of figures in published statements of cash flows; however, as has been pointed out from the outset, the skill of looking firstly at the big numbers (or the most significant headings) is one that you have to develop if reports are to be understood and the financial strategies identified and tracked.

TABLE 8.10 H J Heinz - consolidated statement of cash flows

H J Heinz - consolidated statement of cash flows

SOURCE: Heinz (2011)

TABLE 8.11 H J Heinz consolidated statement of cash flows - simplified

H J Heinz consolidated statement of cash flows - simplified

Table 8.11 is an example of focusing on what may be the important figures, importance emanating from the reason for the analysis, for example in this analysis: 'Is the entity viable from a cash flow perspective?'

Commentary

- The company is profitable, with consistent depreciation each year and other non-cash add-backs, thus a 'cash generator'.

- Capital expenditure is consistent each year and slightly higher than the depreciation, so the company's assets are not being 'run down'; ie its operating capability is being maintained.

- The company has made acquisitions, significant acquisitions in 2011.

- The company consistently pays significant amounts of cash out as dividends.

- There was considerable restructuring, outflows, in financing in 2010 and this would need further investigation.

- In the past two years the company has increased free cash at the year-end.

Conclusion: a stable cash-generating business trading in stable markets -most of us like beans! No wonder Warren Buffet thinks it a sound investment.

What are the links with strategy? Here is a statement from the 2011 Executive Overview Fiscal.

Management believes these Fiscal 2011 results are indicative of the effectiveness of the Company's business plan, which is focused on the following four strategic pillars:

- Accelerate Growth in Emerging Markets

- Expand the Core Portfolio

- Strengthen and Leverage Global Scale

- Make Talent an Advantage.

(Heinz, 2011)

Making good returns and paying dividends are not mentioned, although the company does (see Chapter 7 for a ratio analysis of the figures). The first three 'strategic pillars' are focused on sales growth, which is a key driver for organic growth as explained in Chapter 1. Investing in people is a wise objective if the company is to grow.

Now let's look at a UK-based company in a quite different sector, British Telecom (BT)'s accounts to 31 March 2013 (Table 8.12).

TABLE 8.12 BT pic - summarized group cash flow statement

Page 106

BT pic - summarized group cash flow statement

SOURCE: BT (2013)

This version has been summarized to show the key cash flows in the statement of cash flows - BT uses the traditional term 'cash flow statement'; also, it uses the term 'group', which is synonymous with 'consolidated'.

A, as referenced in the statement, can be traced back to the income statement on page 116, Chapter 6. It is the profit before tax but after interest paid and sundry income items, which are then added back to arrive at B, the profit from operating the business. As profit is the figure including accrued amounts, the effects of accruals and in particular depreciation have to be adjusted; in this case the largest number is from the add-back of depreciation, a cost which does not involve the movement of cash. The result D (after a cash flow for the relatively low amounts of taxation paid) is 5,295 million pounds of cash generated from operating.

The cash flow statement then goes on to show where cash comes from, disposing of investments, or far more commonly where cash is expended on investment, particularly on property, plant and equipment, E. In 2013 we can see that BT pic is a cash generator, there being a surplus of generated over spent of 3,103 million (which is clear from section F).

The cash flow statement then continues to show cash flows from financing activities, and with BT pic, as is often the case, funds flow into financing in the form of interest paid, dividends paid and the net paying off of borrowings, 2,271 million being the net use of the surplus funds from section F. A positive balance of cash does remain and this is shown in the balance sheet as an increase in cash and cash equivalents across the year. Note from section 23 to the accounts, shown in Table 8.13, the reconciliation of the 859 million net increase in funds, H.

 
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