Source of Cash vs. Use of Cash

how do we understand what's a source and what's a use? I understand AR/AP, but are there other instances?

Sources vs. Uses of Cash on the Balance Sheet

Broadly speaking - sources of cash are things that yield cash and uses of cash drain the cash balance. Assets are typically a source of cash as they can be sold to gain cash and liabilities are uses of cash as they turn into an expense down the line either paying accrued expenses or long-term liabilities.

What Increases Cash?

On the balance sheet - you increase cash when you sell assets, issue equity, issue new debt, or take on other liabilities.

Assets - if you sell property, plant, and equipment or when you sell inventory (not on credit) you will gain cash. If your current assets decrease (such as accounts receivable) that means you have collected payment and your cash increases.

Liabilities - if current liabilities such as accounts payable or accrued expenses increase - that means that you have waited to pay a vendor or another party and therefore have "gained cash" in the moment by not paying an obligation.

Equity - if you issue equity - you gain cash or some other asset.

What Decreases Cash?

Cash decreases when assets other than cash increase, when a company repurchases equity, or when liabilities decline.

Assets - when you purchase an asset such as PP&E or inventory, you are decreasing your cash balance as you have purchased those items. The same can be said for current assets such as accounts receivable. Since A/R is money that you are owed by customers - you have not yet gained the cash that you have already earned and therefore that decreases what your cash balance should be.

Liabilities - if a company's liabilities are falling you are paying off deferred expenses such as accounts payable which will lower your cash balance. The same can be said with long term debt. If the company has paid back its long-term debt - that will have lowered the cash balance.

Equity - if a company repurchases its shares that will lower the cash balance. However, a fall in equity does not necessarily mean a fall in the cash balance since a negative net income flows into retained earnings. Dividends paid out can also result in a decline of cash.

Sources vs. Uses of Cash in M&A Analysis

In M&A analysis, a source and uses table shows the bankers and the companies what different kinds of capital is being used to finance the transaction and the fees and where that capital is going. Sources must equal uses so all capital must be used.

Sources include: existing cash on the balance sheet, revolver, new debt issuances, new equity issuances.

Uses include: purchasing the target's equity, repaying the target's debt or refinancing the target's debt, as well as the financing and transaction expenses.

Please refer to a video about how to build a sources and uses table below.

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Comments (48)

Jan 14, 2010 - 11:26pm
Optimist, what's your opinion? Comment below:

source: revolver, some sort of debt, equity use: working capital, acquisition capital, repaying existing debt, amortization of fees etc.

Jan 14, 2010 - 11:37pm
gekko2, what's your opinion? Comment below:

would you mind elaborating a bit on the rationale behind why they're uses and sources?

AR -- because for dollars coming in, they're delayed -- hence useAP -- because for dollars going out, you're delaying the payment -- hence source

what about the above?

Best Response
Jan 14, 2010 - 11:48pm
San Ford, what's your opinion? Comment below:

Think of it in simplistic terms from an asset vs. liability/equity standpoint.

Increase in asset = use of funds (purchasing inventory; capex; prepaying expenses) Decrease in asset = source of funds (disposition of fixed assets; A/R decrease goes to cash)

The inverse is true for liabilities/equity:

Increase in liabilities = source of funds (loan proceeds; drawing availability on revolver) Decrease in liabilities = use of funds (paying off loan/revolver) Increase in equity = source of funds (capital raise) Decrease in equity = use of funds (stock repurchases)

Jan 15, 2010 - 12:42am
jhoratio, what's your opinion? Comment below:

Use of cash is pretty easy. You used some cash.

Source of cash is a little more difficult just because the word "source" throws you off a bit. Don't think of it as exactly a "source" like Source Perrier is a source of water. Rather, understand it as a "reason that you have or STILL have the cash." If you buy something on credit, then the credit is the REASON you still have the cash in your pocket rather than being required to part with it immediately when you bought whatever it is you bought. AP is technically a "source of cash" but more accurately it is the reason you still have the cash. It's not like AP is some giant from the hills that comes down now and again to give you some cash. Generally, when Inventory goes down, you must have converted some of it to cash so a decrease in inventory (all else equal) is a reason why you might have a bit more cash now. Again, the boxes on the shelves don't spring to life and hand you rolls of bills. Not exactly a "source" of cash. But a definite reason or explanation as to why you might have some now.

Jan 15, 2010 - 8:54am
MezzKet, what's your opinion? Comment below:

I'd go even simpler....

all sources / uses are built for a transaction: underlying assumption

at close date, anything that injects money into the company / transaction is a source: new equity, new debt...

anything that gets paid out is a use... equity purchase, debt refinance, transaction fee...

ex. one of the more complicated ones ppl have trouble grasping esp in LBOsif management gets paid out, then write that amount in equity purchase (essentially mgmts payout), if they reinvest a portion then write that in as a uses (dont worry, the sponsor covers the additional equity necessary)...

think of it all and lay it out as a inflow / outflow of cash, and if necessary breakdown the U&S as such, in detail..

Nov 12, 2012 - 6:24pm
ibanker26, what's your opinion? Comment below:

Interview Question - sources and uses tables (Originally Posted: 11/08/2008)

If I have a sources and uses table and I see under sources that I have $10mm of cash, $100mm of bank debt and $80mm of sponsor equity, what would the Shareholders' Equity section of my balance sheet look like? Assume the transition occurred at December 31, 2008 and I am looking at the balance sheet as of January 1, 2009.

Nov 12, 2012 - 6:25pm
Cornelius, what's your opinion? Comment below:

nt

------------ I'm making it up as I go along.
Nov 12, 2012 - 6:26pm
ibanker26, what's your opinion? Comment below:

Sources and Uses (Originally Posted: 02/02/2009)

Since financing fees are able to be amortized, would you include the entire amount in fees/expenses in sources and uses?

Nov 12, 2012 - 6:28pm
ibanker26, what's your opinion? Comment below:

Cool. That's what I thought. So, I essentially include both M&A and total financing fees under uses, although I am treating them differently (as M&A is paid outright and financing costs are amortized).

Nov 12, 2012 - 6:31pm
nickcab, what's your opinion? Comment below:

Interview Question on Uses and Sources of Cash (Originally Posted: 01/05/2010)

Quick Question:

I have been asked this in a finance interview and do not know anything about it. The interviewer asked me, "Is accounts receivable a use or a source of cash?" Can you guys please explain to me what uses and sources of cash are and specific examples? What are these terms used for as well.

Thanks,

Nov 12, 2012 - 6:32pm
ac737, what's your opinion? Comment below:

FWIW, Here's the Vault Guide answer:

  1. Is accounts receivable a source or use of cash? Is accounts payable a source or use of cash?

This type of question is important, because it taps your understanding of how a company can use its cash, credit and collections. Accounts receivable is a use of cash, because for every dollar that should be coming in the door from those that owe money for goods/services, that cash has been delayed by a collection time period (i.e., a company is waiting to "receive" money). Conversely, accounts payable (think: a credit card), is a source of cash, because companies have the ability to purchase items.

Nov 12, 2012 - 6:33pm
jimbrowngoU, what's your opinion? Comment below:

Well, a couple of ways to approach this, but in general I would consider it a use of cash. When a sale occurs and it is invoiced rather than paid-in-cash, it "drains" cash, as it is booked as a revenue (flows to net income) but is not booked as an increase in cash. So as accounts receivable increase, revenues increase and net income increases, which increases the top line on the cash flow statement. The increase in accounts receivable is a decrease in (thus a use of) cash on the cash flow statement because an adjustment needs to be made.

In general... when assets increase, it is a use of cash, and when liabilities increase, it is a source of cash, and vice versa.

  • 1
Nov 12, 2012 - 6:35pm
nutsaboutWS, what's your opinion? Comment below:

its a use and a source. it all depends.

-- "Those who say don't know, and those who know don't say."
Nov 12, 2012 - 6:36pm
Stringer Bell, what's your opinion? Comment below:

Q: Sources & Uses and Offset Debt (Originally Posted: 08/19/2012)

Quick question for SEASONED deal monkeys and real estate / REIT / project finance folks:

Doing a little real estate side deal w/ this rich dude I know. I'm trying set up the S&U's for this deal were he kicks X amount of cash to fund uses and he wants to take on debt in year n+2 of the project. Do I still show debt in the sources portion? If so how?

My first thought is that I wouldn't as the project would be fully funded at that point, however on a discounted basis does this future debt get any credit for funding the project?

Thanks

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  • 1
Nov 12, 2012 - 6:38pm
RE Capital Markets, what's your opinion? Comment below:
re-ib-ny:
I would show two S&U tables, one for the initial transaction and one pro forma for the recap.

This is one way to approach it. Typically, S&U should just be relevant to the acquisition day one.

Do you have a financing dashboard? If so, it should show how the transcation is being funded and any refinancing/new debt/recapitalizations druing the hold period.

This would be my approach - show S&U as you typically would (in your case, it sounds like the transaction is 100% equity) and then have the new debt shown in the financing dashboard (if your model is set-up correctly, you will have to anyway).

Man made money, money never made the man
  • 2
Nov 12, 2012 - 6:39pm
Stringer Bell, what's your opinion? Comment below:

Great, thanks guys, SB's for both. RE Cap Markets, I concur, however the financial partner here is pretty old and unsophisticated so the two cap table approach will have to suffice for the time being.

thanks

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Nov 12, 2012 - 6:40pm
kaisersosay, what's your opinion? Comment below:

Sources and Uses Help Needed (Originally Posted: 02/21/2014)

Advance thanks for helping a novice and sorry in advance for dearth of financial info. Have an urgent request from boss to provide Sources and Uses for acquisition target that can be presented to lenders. Private deal, purchase price will be $20M, we will need that as term loan, payback 5 yrs. We have existing term loan at 22M with exist lender, 4 yrs left. The full 20M will be used to buy the target, nothing to pay down existing, no internal cash used. Should we be asking for more to pay related costs of purchase (sponsor, legal, closing costs, etc.) - is there a typical % used for this? Finally, what all do I need to show in a Sources and Use sheet.

Nov 12, 2012 - 6:41pm
SSits, what's your opinion? Comment below:

Sources = sources of funding for the acquisition. Your existing loan is irrelevant, as you won't be using that to fund the acquisition. What you've described is a 100% debt-funded acquisition, so Sources = Debt (show as $ and as multiple of the target's EBITDA), while Uses = Purchase Price (same details as last brackets) + Transaction Costs (same details as last brackets).

This is odd though - is there no equity in your funding structure, even at least to pay the transaction costs? You haven't given us enough information for this. Why would lenders fund 100% of the deal when your company doesn't have any equity at risk, unless the debt is secured over a broader pool of assets (eg your fund's other investments)?

Why is your company hiring people who don't know how to put something as simple as a sources/uses table together? Can you let me know the identity of your company so I can take a short position?

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  • 3
Nov 12, 2012 - 6:42pm
kaisersosay, what's your opinion? Comment below:

Thx for the help, don't beat me up I'm on ops side. Came here to learn so that I can understand what finance folks present. First of all, when you say EBITDA multiple how long of a period are you talking about (is it projected 3, 5 yr)? As for how this would lay out in table, is this what you mean? Sources: New debt: $22.5 Uses: Purchase: $20 Trans Costs: $2.5

Seems like there should be more for a lender to want to see in this table.

And yes, the loans are secured against company assets. Lenders want their interest and their notes paid off from free cash the business generates right?

Thanks again for any advice.

Nov 12, 2012 - 6:43pm
LifestyleBanker, what's your opinion? Comment below:

Uses Equity purchase price Financing Fees & OID (original issuer discount)* Other Fees (accountants, legal, consultants, printers) Minimum cash to balance sheet

Sources Term Loan Cash from your balance sheet** Cash from target's balance sheet Stock**

The two should equal out.

*Reflect the full value of this as an asset on the balance sheet. Record annual amortization as a pre-tax (post-EBIT) expense on the income statement. Reduce the value of the asset on the balance sheet by the annual amortization.

**You claim your transaction is 100% debt. "100% Debt" transactions tend to be cash+debt. Why would you play 6.5%-10% interest annually for a term loan/high yield (respectively) when you could just finance a deal, at least in part, with cash that only generates ~0.5% annual return? Unless of course you need the cash to run the business or something. Anyway, you usually need cash. The other alternative is to fill the plug with stock. In either case, you need either case or equity to pay for all the the uses of cash EXCEPT the equity purchase price, if your contention that 100% of THE COMPANY is bought with debt. Your cash/stock should equal fees + min cash in this simple example.

Nov 12, 2012 - 6:44pm
SSits, what's your opinion? Comment below:

EBITDA multiple - use the most recent historic year. If year end is 31 March, use expected EBITDA for year ending 31 Mar 2014, or (if available) calendar year 2013 EBITDA.

Using cash on target's balance sheet as a source - only if the deal is not a cash free, debt free acquisition. Most acquisitions I've seen are cash free, debt free, meaning you are acquiring the company with no excess cash (excess over working capital requirement) and all existing debt will be repaid at financial close.

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  • 1
Nov 12, 2012 - 6:45pm
Mr.Mayor, what's your opinion? Comment below:

Sources and Uses in a Deal (Originally Posted: 04/07/2015)

When using a revolver in an LBO, can you use the revolver as a source of cash at the start of the deal? Assuming the TEV and transaction fees have been paid for using debt and equity, could a revolver be used as source to fund the minimum cash level (created by the net working capital requirements) at the start of the deal? Appreciate any help.

Nov 12, 2012 - 6:49pm
Broadway1, what's your opinion? Comment below:

Basic Question On Sources / Uses (Originally Posted: 06/04/2015)

Hi, Wondering if someone can shed light on a simple sources / uses question for a buyout.

Rough numbers: Total Transaction Value = 1600 Fees = 50 Existing Net Debt = 50

one shareholder holding 25% of the equity is rolling over. Transaction is financed with new debt of 650.

Is the following correct?

Sources: New Debt = 650 Existing Cash = 0 Equity = 950 of which New Sponsor Equity = 712.5 Rollover = 187.5

Uses: Fees = 50 Min Cash = 0 Refi debt = 50 To selling shareholders = 1125 To non-selling shareholder = 162.5 Rollover equity = 187.5

appreciate any guidance on the above.

Nov 12, 2012 - 6:50pm
Zweihander, what's your opinion? Comment below:
Broadway1:

Hi, Wondering if someone can shed light on a simple sources / uses question for a buyout.

Rough numbers:
Total Transaction Value = 1600
Fees = 50
Existing Net Debt = 50

one shareholder holding 25% of the equity is rolling over.
Transaction is financed with new debt of 650.

Is the following correct?

Sources:
New Debt = 650
Existing Cash = 0
Equity = 950 of which
New Sponsor Equity = 712.5
Rollover = 187.5

Uses:
Fees = 50
Min Cash = 0
Refi debt = 50
To selling shareholders = 1125
To non-selling shareholder = 162.5
Rollover equity = 187.5

appreciate any guidance on the above.

What is your definition of transaction value (TV) exactly? I'm assuming it's not EV, because if it was I assume you would have just called it EV, so I assume TV = EV + fees? if that's the case then that gives, EV = 1600-50 = 1550. ND = 50, so equity value = 1500. If rollover shareholder owns 25% then their equity is worth 375.

Sources New Debt: 650 Rollover: 375 Existing Cash: 0 Sponsor equity: 575 [plug to balance the S&U] Total: 1600

Uses Rollover: 375 Proceeds to selling shareholders: 1,125 (ie. 1500 - 375) Refi Net Debt: 50 Fees: 50 Min Cash: 0 Total: 1600

The rollover shareholder will go from owning 25% of the company to owning 39% (375 / (375+575)) in the new company.

You know you've been working too hard when you stop dreaming about bottles of champagne and hordes of naked women, and start dreaming about conditional formatting and circular references.
  • 2
Nov 12, 2012 - 6:51pm
Broadway1, what's your opinion? Comment below:

Many thanks Zweihander. Yeah, by Total Transaction, I did assume what you stated. And sorry one clarification I should have made is that the shareholder that wants to roll-over wants to stay at 25% ownership post transaction, and wants to receive a cashout such that his ownership stays at the previous level.

Nov 12, 2012 - 6:52pm
SoCal-RE, what's your opinion? Comment below:

Sources & Uses (Fees) (Originally Posted: 07/26/2015)

Some of this has been covered in various other posts, but I wanted to consolidate it in one.

Using the example of an off market deal that a sponsor is trying to structure a deal for.

Assume a $50M purchase price. $35M senior loan, $15M equity to close plus closing costs and fees (assume $150,000 in legal, title, escrow, third part reports, loan fees, etc).

Assuming a 95/5, the LP equity requirement would be 95%,

The equity advisor (i.e Ackman Ziff, HFF, etc), is going to charge about 2% on the LP raise. Call it $300,000 roughly. I have heard that LPs will often time impose a dollar cap limit on this fee, so that in the cases of large raises where the 2% might be over $1M, the LP will only agree to the fee up to a certain ceiling (for example, a max of $500k and no more after that). Has anyone else seen that, and do these equity placement firms understand that concept?

The broker who brought the sponsor the deal is asking for 1/2 point as a finder's fee. $250,000. Sponsor is asking for a standard 1% acq fee, $500,000.

So in total, you have a $50M price, $150 in closing costs, and a total of $1,050,000 in acq fee, finder fee, and equity placement fee.

I am going to go out on a limb, and assume that many/most LPs will review the sources and uses and immediately raise issue with the fees being tacked on.

As the sponsor in this position, how would you justify your position, the associated fees, etc? i.e. what would your rebuttal be when the LP says "there's too much fluff in fees being added onto the top"?

Nov 12, 2012 - 6:53pm
scott hartnell, what's your opinion? Comment below:

If the LP thinks the fees are too high, either agree and renegotiate or dont and tell LP to back off.. if a deal dies because of broker fees it probably wasn't going to happen anyway. If you want, you can make LP the bad guy to the broker and push back on fees to get the deal done/save money, this happens pretty often before closing. I personally wouldnt use a broker to raise money anyway

Nov 12, 2012 - 6:54pm
cre123, what's your opinion? Comment below:

The LP wouldn't exist in this deal without the equity broker finding the LP for the deal in the first place. How could the LP argue with the GP to not pay the equity broker who incepted this deal for the LP in the first place? I'm getting dizzy.

The closing costs and the closing costs.

Acquisition fee can and does get renegotiated.

Nov 12, 2012 - 6:57pm
SanFran_RE, what's your opinion? Comment below:

Just finished up a $88M deal where we underwrote $1.2M for closing costs. After all was said and done we were stuck with $1.8M in closing costs plus another $700K in prepaid reserves required by the debt provider. It cost us almost 100 bps on our 5-year projection. I was very surprised to see how the fees just started stacking once we went into closing.

Nov 12, 2012 - 6:59pm
Broadway1, what's your opinion? Comment below:

Sources / Uses Question (Originally Posted: 12/18/2015)

Hi Guys, Have a basic question on sources uses.

We are looking at a buyout of a company where there Target we are looking has certain receivables that we believe are basically uncollectable in our view (management has a different view), and we would want them to write these off as part of the deal. Now, they (the Target) would only do this if there is a deal on the table, not as part of normal course of business.

Question is - How would this be reflected in the sources uses table?

Thanks in advance.

Nov 12, 2012 - 7:00pm
firebi234, what's your opinion? Comment below:

Doesn't really make sense to handle via sources and uses. Should probably account for it in setting the NWC target.

Nov 12, 2012 - 7:01pm
EBITDAd_jokes, what's your opinion? Comment below:

sources and uses in a merger model (Originally Posted: 01/14/2016)

hi guys - very quick basic question, but when we are talking about the "sources and uses of funds" table in a merger model, from whose point of view should i look at this? is this a table showing me the sources and uses from the point of view of the investment bank/PE firm, the acquiring company, or the target company? thank you!

Nov 12, 2012 - 7:02pm
Attack_Chihuahua, what's your opinion? Comment below:

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Nov 12, 2012 - 7:03pm
SSits, what's your opinion? Comment below:

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