To help your learning, I have also put together an example spreadsheet which demonstrates the required interconnectivity. I will also explain the interconnectivity between the different lines of the cash flow statement and demonstrate why balance sheet accounts and, in particular, Net Working Capital have a central role in making it all work. All of this can be avoided by following a strict but simple methodology:īuild financial models with correct interconnectivity between the three primary accounting statements: income statement, balance sheet, and P&L.īelow is a step-by-step method to ensure your cash flow always balances and tallies. Second, it creates unnecessary costs arising from the extra work required to dig out the missing pieces, generating extra labor hours on both sides of the transaction. First, it creates doubts and worries in the buyer’s mind: “How can we trust the accuracy of the numbers if different sources give different results?” This can be a dealbreaker or can taper confidence in the team’s ability to execute. I have worked on several financial due diligence projects for M&A deals where data provenance was a problem. When something falls out of line between all these sources, it very quickly causes critical imbalances in a model. The most common reason is the wide range of data sources used by the company: the sales teams’ tracking software, CapEx files maintained by the CFO, and inventory reporting metrics from the procurement team, to name a few. Whether I’m looking at acquisition opportunities at HoriZen Capital or building best practices models, I often see cash flow statements that don’t reconcile with the balance sheet.
#Cash flowing assets download
To download the example cash flow statement used throughout this post, click here.
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