Financial Statements and Firm Value 135Cash Flow Forecasting
A cash flow statement is an ex-post statement of net cash flows from operating, investing, and financing
activities of a company prepared from two balance sheets. A cash flow forecast is a forward looking finan-
cial planning tool. To prepare a cash flow forecast, predict the cash proceeds and cash disbursements during
the period. The excess of cash outflow over cash inflow is the external funds requirement.
External fund requirement = Total uses – Total sourcesWhether a company has external financing need depends on sales growth, length of cash cycle and future
level of profitability and profit retention. Those companies with high sales growth, long cash cycle and low
profitability will have to seek external financing frequently. (Why?) High growth in sales need not always
result in a need for external finance. A company that extends no credit to customers or carries few current
and fixed assets can experience rapid sales growth without seeking external finance as long as it is reasonably
profitable. Because the company has few assets, the increase in total assets is largely offset by a corresponding
increase in current liabilities.
To fix the idea consider an example. In order to equip itself with high-tech capabilities, a telecom com-
pany is making massive capital investments. The forecast of the same is given here:
(Rs crore)
1995 1996 1997 1998–2001
121 115 89 270
The company currently earns Rs 46.4 crore after-tax (PAT). The company expects PAT to grow at 25 percent
per annum for the next three years, and decline to 15 percent for the next four years. The company is currently
paying 80 percent of its earnings as dividend and feels that the same payout should be continued. Assume the
following figures for depreciation: Rs 20 crore, Rs 26 crore, Rs 30 crore for the next three years; and
Rs 150 crore for the following four years (cumulative).
Sources of funds = Net income + Depreciation
Uses of Funds = Capital expenditure + Incremental net working capital + Dividends
External fund requirement = Sources – UsesThe forecast of sources and uses of funds and the external funding requirement is given here:Sources
Profit after tax 58 73 91 522
Depreciation 20 26 30 150
Total 78 99 121 672
Uses
Capex 121 115 89 270
Inc. W.C.^415203050
Dividends^5465873418
Total 182 193 192 738
External funding
need (annual) 104 94 71 66
(^4) Assume the following figures. In reality you will have to estimate working capital on the basis of target current ratio,
lending bank’s norms and sales growth.
(^5) Eighty percent profit after tax.