1 00:00:01,440 --> 00:00:06,040 Before we move on, to the next stage stage of this course, I want to just call out 2 00:00:06,040 --> 00:00:11,340 some important vocabulary and concepts related to the cash flow statement. 3 00:00:11,340 --> 00:00:16,810 We talked about the three sections operating, investing, and financing. 4 00:00:16,810 --> 00:00:18,590 Operating shows the cash inflows and 5 00:00:18,590 --> 00:00:22,000 outflows related to the day-to-day operations of your business. 6 00:00:22,000 --> 00:00:25,420 Investing shows the cash inflows and outflows related to your 7 00:00:25,420 --> 00:00:29,810 business investment activity, this could be related to purchases of assets for 8 00:00:29,810 --> 00:00:35,650 future operational benefit or more typical investing types of activities. 9 00:00:35,650 --> 00:00:40,130 Then there's the financing section, this shows the cash inflows and 10 00:00:40,130 --> 00:00:44,710 outflows related to debt and equity funding sources of your business. 11 00:00:45,730 --> 00:00:52,269 Let's go a step further and talk about what is known as free cash flow. 12 00:00:52,269 --> 00:00:54,931 Free cash flow, abbreviated FCF, 13 00:00:54,931 --> 00:00:59,950 is the sum total of your operating and investing cash flows. 14 00:00:59,950 --> 00:01:03,840 So here, we're looking at Facebook's 2017 cash flow statement. 15 00:01:03,840 --> 00:01:08,980 If we scroll down, we can see that 16 00:01:08,980 --> 00:01:15,040 they had $24.216 billion in cash flow from operating activities. 17 00:01:15,040 --> 00:01:21,690 If we add that plus their $20.038 billion investing cash outflows, 18 00:01:21,690 --> 00:01:27,090 we get $4.178 billion in free cash flow. 19 00:01:28,180 --> 00:01:30,860 So why is it called free cash flow? 20 00:01:30,860 --> 00:01:35,380 It's certainly not free, as it comes as a result of a lot of hard work, time, 21 00:01:35,380 --> 00:01:37,640 and money invested and spent, right? 22 00:01:37,640 --> 00:01:40,635 Well, what this means and 23 00:01:40,635 --> 00:01:44,975 why it's a number that is often looked at by stakeholders is because 24 00:01:44,975 --> 00:01:49,935 this is the cash flow that the business generated before taking into account 25 00:01:49,935 --> 00:01:54,075 any impact from the organization or business' capital structure. 26 00:01:54,075 --> 00:01:59,545 In other words, free cash flow is the money the business generated or lost 27 00:01:59,545 --> 00:02:04,155 before paying back debt, or dividending out money, or taking on more debt. 28 00:02:05,630 --> 00:02:09,730 This starts to touch on some more advanced subject matter beyond the scope 29 00:02:09,730 --> 00:02:10,970 of this course. 30 00:02:10,970 --> 00:02:16,060 But I want to make sure you are aware of the concept of free cash flow. 31 00:02:16,060 --> 00:02:20,865 I'm gonna be brief here but your sources of funding are gonna come with costs, 32 00:02:20,865 --> 00:02:23,765 equity holders want a certain rate of return, and 33 00:02:23,765 --> 00:02:26,165 maybe they're relying on dividends as part of that. 34 00:02:27,205 --> 00:02:30,047 Debt holders are gonna demand a return as well. 35 00:02:30,047 --> 00:02:33,337 And will want to have their debt be paid by a certain point in time. 36 00:02:34,537 --> 00:02:38,807 These stakeholders will almost always scrutinize the companies free cash flow 37 00:02:38,807 --> 00:02:40,877 before making any funding decisions. 38 00:02:40,877 --> 00:02:44,917 Because it is one signal and an important one for 39 00:02:44,917 --> 00:02:48,627 a company's ability to pay for funding. 40 00:02:48,627 --> 00:02:51,710 Let's move on to discuss net cash flow. 41 00:02:51,710 --> 00:02:56,260 This is the summation of all of your cash inflows and outflows for the period. 42 00:02:57,260 --> 00:03:01,230 It's your free cash flow plus your financing cash flows for the period. 43 00:03:02,260 --> 00:03:04,160 If you have a positive net cash flow, 44 00:03:04,160 --> 00:03:07,070 then you can increase your cash balance over the period. 45 00:03:07,070 --> 00:03:10,910 If you have a negative net cash flow, then your cash balance decreases. 46 00:03:11,920 --> 00:03:16,210 Often times, people think that when they generate a profit, that means their 47 00:03:16,210 --> 00:03:20,430 business has made money, and their bank account balances are increasing. 48 00:03:20,430 --> 00:03:24,950 But, as I hope you're starting to understand a little better after going 49 00:03:24,950 --> 00:03:28,990 through the cash flow statement, generating a profit or net income on 50 00:03:28,990 --> 00:03:34,590 the P&L doesn't always mean you generated cash over a period of time as a business. 51 00:03:35,750 --> 00:03:40,960 Net cash flow is one of the most important metrics on a financial statement. 52 00:03:40,960 --> 00:03:44,240 For the vast majority of startups out here, net cash flow is 53 00:03:44,240 --> 00:03:48,800 going to be negative, and this number is your burn rate for that period of time. 54 00:03:50,170 --> 00:03:54,410 Okay, we've talked about the three major financial statements. 55 00:03:54,410 --> 00:03:56,060 In the next stage of this course, 56 00:03:56,060 --> 00:03:58,730 we'll bring everything together that we've learned. 57 00:03:58,730 --> 00:04:02,570 Before that, I do want to note that there are some other financial statements we 58 00:04:02,570 --> 00:04:08,000 haven't covered in this course, for example, stock holders' equity statements. 59 00:04:08,000 --> 00:04:09,460 As this is a basics course, 60 00:04:09,460 --> 00:04:13,110 we limited the scope to the statements most often discussed. 61 00:04:13,110 --> 00:04:16,430 That's just a heads up for you in case you've come across these other statements 62 00:04:16,430 --> 00:04:18,330 while conducting your own analysis.