Steve's Financial Modeling Tutorial

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Model Basics
Income I
Income II
Balance Sheets
Corporate Tricks I
Corporate Tricks II

High Cash Flow - No Profit

Here's a great trick.  In fact, it's less a trick than standard operating procedure at many companies.

Hopefully, you've gotten some idea from this tutorial about the difference between cash flow and profit.  As a quick recap, cash flow is what's coming in minus what's going out.  Income is all the revenue minus the expenses, but includes non-cash charges.  Key is that cash flow can be measured as just cash from operations or can include cash from financing and/or cash from investing.

If you sell shares, you're cash flow will rise.  In fact, if you sell an asset your cash flow will rise. 

So just sell shares and spend all your time selling shares and forget about profit.  Profit is for ninnies.  Cash flow is for real businessmen anyway.

Pumping Earnings By Losing Money

Strange but true!  What you do is this.  (This really happened). Let's say you are IBM.  You buy Lotus Software for some multi-billion dollar number.  After buying a big company, normally you would put the, say, $3.5 billion on your balance sheet and amortize it over several years, taking a non-cash charge each year to reflect the multi-year nature of the cost. This would reduce your earnings per share in the future, but you wouldn't have to recognize a big loss all at once from the acquisition.

But if the market is crappy and lots of companies are taking big charges, you could, instead, take one WHOPPING charge against earnings the year you bought Lotus.  In future years there's no amortization, resulting in higher earnings per share.  It's just accounting, but ain't it great?

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