Headroom & Cash Flow, page-51

You cant use Cash flow statement (T1) to predict Cash flow statement (T2) but you can Use Balance Sheet (t1)+ Income Statement (Forecasted t2) to derive Cash Flows Statement (t2).

Here is a really good example, i suggest you read it carefully.. It explains why my rational why my argument works and yours doesnt.

Lets for example say we have a mining company who mines 1,000 ounces of gold in the first half..  Lets further assume that this gold was not yet sold, instead it will be sold on the first day of the next half.. As a result you will have no income for the first half, you will however have, incurred a number of costs such as salaries, paying suppliers etc which have all been realised in the current half.

This unsold gold will sit on the Balance sheet as a current asset, until it settles in the next half.

Hence our cash flow statement would look something like this

Revenue
$0

Expenses
$2mil (Wages)
3mil (equipment)
$1mil (suppliers)
etc. etc..

Our current assets would be

Assets:
1,000 ounce

If we were simply to use  your method of  forecasting cash flows using, Cash flow statement (T1) and Forecast Cash Flow Statement (T2) using percentages (which BTW is  indeed a legitimate way of doing things but would not work for this scenario or SGH). We would attain a very distorted cash flow statement in which we would see that cash is constantly being burnt to pay employees yet nothing has come into the company, an assumption you are using..Hence why your arguments are so flawed.

Your cash flow for T2 might  look something like this

Revenue
$0 + 10% ($0)

Expenses
$2.2mil (Wages) + 10%
3.3mil (equipment)+ 10%
$1.1mil (suppliers)+ 10%
etc. etc..

Thus you are not accounting for the 1,000 ounces of gold sitting waiting to be sold.  And cannot use the Cash flow statement alone to predict future cash flows (t2).

My approach works much better. We use the balance Balance Sheet approach, we know that 1,000 ounces is sitting there awaiting to be sold, we add this to the cash flow pile, we also take away any forseen liabilities which are to be paid over the next 12 months. We know exactly how much liquidity will be available in the following half from the balance sheet if we assume nothing drastic happens.(This is my SGH does nothing scenario)

The second half the mining company will be working very hard, paying its employees and digging gold they have made another 1,100 ounces of gold this half (we predicted 1,000 in the forecasted cash flows using the balance sheet and keeping it constant), lets assume that this gold settles in the current half and was not delayed. This firm would have sold  1000+1,100 ounces of golde. A truckload of revenue...

Using your approach of forecasting cash flows (t1) to (t2) this company would have been broke as they have never made  a single ounce and have constantly paid employees..

My aproach predicts 2,000/2,100 ounces.

I think ive made my point very clear.