![]() The DCF valuation tool is fantastic, but we must also be aware of its limitations. Is the Discounted Free Cash Flow (DCF) Model reliable at valuing companies? ![]() The multiple you choose can either be the current EV/EBITDA multiple of the company in question, or you could choose the multiple of a competitor or the industry average. There are several different ways you can tweak the DCF calculation, the most common technique is to discount the expected cash flows over the next 5-10 years back to today’s value using the WACC and to work out the terminal value of the following years by taking the final years cash flow expectation and dividing it by the terminal growth rate (usually using growth equal to the expectations for long term inflation).įor our model, we take a slightly different approach to calculating the terminal value by forecasting the EBITDA over 10 years and then working out the terminal value as a multiple of the EBITDA in year 10. Many online resources readily calculate the WACC of most public companies, which you can use for this calculation, but if you want to calculate the WACC yourself, we also have another more detailed calculator that you can download. Learning how to read and interpret each statement and how to connect them all together with other retail metrics will definitely improve the financial performance of your retail business over time.Along with the calculator, we have supplied detailed instructions ( including a video) on where you can the required inputs for the calculation, such as the TTM Free Cash Flow, TTM EBITDA, Net Debt, and how to calculate the FCF, & EBITDA growth rates.Īnother required input is the company’s Weighted Average Cost of Capital (WACC). That’s why we always advice any retail or e-commerce business owner to look at their retail financial statements as a whole, and not only on the P&L statement. It is actually the wise thing to do in this case, although it results in loss on this inventory. You will also understand that sometimes it is ok to take a loss on some obsolete stocks, just to be able to free up cash flow for the business. However now that you know what effect this will have on your cash flow and inventory turnover, you will think again and weigh all the pros & cons of taking that offer. You might think “ That’s great! This means higher margin and more profits for me“. Understanding all those dynamics will allow you to operate your retail or e-commerce business differently.įor example, you might be tempted to take that great offer the supplier is giving you of 20% off if you purchase more stocks. ![]() This could also mean that you will have to take out a loan or line of credit to meet all your payment deadlines, which will put additional cost of interests on you in the future. Your cash could be trapped due to having too much inventory, for example, or due to poor collection of invoice payments from your customers. This will reduce your ability to take money out of your business or invest more money into growing & expanding your business. ![]() It means that you can be operating a very profitable store, yet you are not able to pay the bills month in and month out, due to poor cash flow management. So it will appear as 2000$ of depreciation and deducted from your profits each year for 5 years. On your P&L however, this amount is spread out over ,say, 5 years and recorded at 20% (2000$) each year. If you invest 10,000$ in a new equipment this goes straightaway out of your bank account at the time of investment, and hence reduces your cash by 10,000$. The method used to calculate net profit in your P&L statement doesn’t reflect the amount of cash coming in or going out of the business for the same year. Many new business owners assume that making that amount of net profit at the end of the year automatically means they can get that same amount out of the business and use it for their expenses. This could be to buy new equipment, build new stores, buy a property.etc.ĭownload a monthly retail cash flow management excel template from the members area. Capital ExpenditureĬapital Expenditure or CAPEX is the the capital you invest in the business. – Other miscellaneous payments related to operations. – Cash you paid to your vendors for your products – Cash you paid to operate the stores (rent, salaries, admin, marketing.etc) You can extract the figure for Cash From Operations from your cash flow statement.Ĭash you received from selling your products ![]()
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