Hi,
tasked with a building a model for Visa. They have a line item called client incentives that is a non-cash expense. How should you go about incorporating this item into your three statement model? I have it as an expense in income statement and I add it back in CFO but then my balance sheet is unbalanced as the cash balance is higher. Would appreciate some help.
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Adjust the balance sheet items that correspond to client incentives.
That's what I'm a bit confused about bc its not like D&A where it corresponds directly to PPE. What line item should I adjust it to?
Theres literally a line item on their BS that says "Client Incentives"
Took a quick look at their FY 23 earnings press release and it’s a non-cash expense in their walk down to net revenue so you wouldn’t add it back to CFO. The expense is just forgone revenue so your build to net income / EBITDA that flows into CFO already captures the cash impact via lower revenue.
Sorry, I'm a bit confused but wouldn't you add it back to CFO because even though the income statement/net income shows it as forgone revenue you haven't actually lost any "cash" (like D&A or something).
You do lose cash because you forwent the revenue which means you forwent the cash associated with that revenue. You don’t need to adjust for it because it’s already baked into Visa’s net revenue figures. It’s not like D&A which is purely a made up P&L line item to lower your taxable income (you don’t pay anyone D&A so you need to add it back if you’re building CFO off net income vs. you “pay” for client incentives by taking less revenue as opposed to taking higher revenue and then realizing higher expenses)
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