Can EBITDA be a better metric than operating cash flow? Yes, it can!
13. travnja 2023.Tri koraka za prevenciju problema s cash flowom
17. travnja 2023.Several examples have already shown that the opportunistic usage of EU funds has not brought the desired results. Moreover, some companies have increased their leverage beyond acceptable level, while the investment has not brought the increase in cash flows.
Are EU grants then a curse or a blessing?
If a company has a clear strategy, and would do an investment anyway, then it is more likely to be a blessing.
If a company is thinking “it would be nice to get the free money”, then it is more likely to be a curse.
The problems arise due to:
- Ignorance that Capex often has to be paired with investments in working capital
- The capacity utilization of new assets remains below acceptable level, bringing suboptimal results
- New debt intake to cover the remainder of an investment needs to be repaid eventually, and if new assets do not create new value, the leverage increases
- Overall cash flow suffers as large investments normally generate additional operating costs and strain internal resources
What is the effect of the investment on a company’s cash flow?
Free cash flow (FCF) for the year will be lower due to: (i) higher Capex, (ii) investments in working capital, which oftentimes follow higher Capex, and (iii) additional operating costs .
In addition, the remaining part of the investment, not covered by the EU grant, has to be financed either through operating cash flow, fresh equity, or new debt. The latter is the prevalent additional source of financing, which brings more risk.
How to avoid these common mistakes?
There are 3 steps to make sure your investment does not end in a disaster:
- Have a clear strategy what you need to invest in, regardless of the available EU funds. Don’t invest for the sake of investing. Free money is not always completely free.
- Calculate the total investment – Capex, investments in working capital, one-off Opex, financing costs associated to new debt, etc.
- Calculate the effect of the investment on your cash flow, plus what impact will the investment have on your leverage level and liquidity going forward.
Make an investment only when you are certain that the preceding 3 steps point to a positive effect. While cash flow will be negatively impacted in the year of investment, as long as you are certain that the future cash flow effects will be positive, you are good to go.
In case you want to see what effect your investment will have on your cash flow,send an email to mario@creditanalyst.eu to book a discovery call.
CreditAnalyst.eu helps CFOs and CEOs make informed strategic and financial decisions through advanced financial statements analyses.
