Sources and Uses of Cash Schedule

How cash is tracked for a transaction

What is a Sources and Uses of Cash schedule?

A Sources and Uses of Cash schedule gives a summary of where capital will come from (the “Sources”) and what the capital will be spent on (the “Uses”) in a corporate finance transaction.  When computing their total amounts, the sources and uses accounts should equal each other.

The sources and uses schedule becomes very important and useful when creating a model for situations like Recapitalizations, Restructurings, and Mergers & Acquisitions and commonly used in investment banking.

The guide will teach you all you need to know about a Sources and Uses Schedule and how to build one yourself… an important step in becoming a world-class financial analyst.

 

Example of a Sources and Uses of Cash schedule

Here is an example of a sources and uses schedule.  The table illustrates the sources and uses of cash in a transaction, and the two sides must equal each other.  This is commonly performed in the financial modeling of a deal.

 

Sources and Uses of Cash

 

How the Sources and Uses of Cash schedule is Setup

 

Step 1: Purchase Price

Calculating the Purchase Price to acquire a target business or asset is the first step of determining how much cash is needed and where it can be obtained. This must either be known or assumed.

 

Step 2: Uses of Cash

Working Capital: Working capital is found in the closing balance sheet of the target company. A successful business must have enough and ready reserves of working capital because it is the cash on hand of a company when it needs to use it. When a company experiences a shortfall in liquid assets, it will need cash to fund its day to day operations, to meet its current liabilities and to continue earning more revenues.  See the working capital formula here.

Fixed Assets: This is calculated by taking the Purchase Price minus the Working Capital Assets. Fixed assets are tangible, long-term assets that take more time to be converted into cash and are used in the production of a company’s income. They can take the form of buildings, machinery, vehicles, land, software and computer equipment.  The largest group of these is referred to as Property Plant & Equipment (PP&E).

Fees: The fees must have their own schedule. They have to be known or assumed for the calculation of total uses of cash. These are fees incurred during an acquisition.

Total Uses: This is the sum of the purchase price of the asset and the fees.

 

Step 3: Sources of Cash

Debt: This is usually expressed as a multiple of EBITDA (Debt/EBITDA). Each debt that a company obtains from borrowing must be assumed. Examples of corporate debt are bonds, debentures, commercial paper, and loans.

Preferred Equity: The value of this type of equity is typically assumed in aggregate. It sits in between senior debt and common equity and combines features of both debt and equity.

Common Equity: This is determined by subtracting both debt and preferred equity from the total sources of cash. Its amount is the total investment that common shareholders have in a company. It’s held by founders, employees and outside investors.

Total Sources: This should equal the Total Uses of Cash.

 

Situations for Sources and Uses of Cash Schedule

 

Recapitalization

A recapitalization achieves a more stable or optimal mixture of both debt and equity. The change is in the capital structure of a company, and it’s done so for a number of reasons such as minimizing the taxes paid by the company, preventing a hostile takeover from a private equity or executing an exit strategy for VCs.

If a company swap debt for equity, it means it will issue shares to pay down debt, thereby increasing the share of equity capital and maintaining more cash in the business. In contrast, issuing more debt gives the company cash to buy back shares or pay out dividends. One of the benefits to this is interest’s tax-deductible feature.

To learn more, check out our financial modeling and valuation courses.

 

Restructuring

Restructuring happens when a company wants to improve its business profitability and to steer clear from financial difficulties. It involves changing the structure, operations, and debt of a company. For instance, a company isn’t generating enough revenue to cover its expenses because it’s below par products aren’t selling enough.

To meet debt obligations and make payroll payments, the company may have to reduce its size through the sale of its assets. Furthermore, it may restructure the terms of its debt to possibly achieve a smaller percentage of interest payments over time.

To learn more, check out our financial modeling and valuation courses.

 

Mergers & Acquisitions (M&A)

An acquisition means that an acquiring company will have more than 50% ownership of a target company. The company may buy all of the ownership stakes and assume total control of it. It involves purchasing stocks and assets of that company. The acquisition can be paid for in cash, stocks or a combination of both. The common motive behind this corporate action is to drive more growth for the acquirer. Because of acquisition, growth can be achieved through economies of scale, greater synergy, cost reductions and new product or service offerings in a new market.

The acquisition can be paid for in cash, stocks or a combination of both. The common motive behind this corporate action is to drive more growth for the acquirer. Because of acquisition, growth can be achieved through economies of scale, greater synergy, cost reductions and new product or service offerings in a new market.

In planning for an acquisition, the Sources and Uses of Cash Table is very important to ensure the transaction is properly funded.

Read more about the M&A process here.

 

More resources

At CFI our mission is to help you advance your career.  We hope this guide creating a “Sources and Uses of Cash schedule” has been helpful and we encourage you to check out the additional resources below: