Source of Cash vs. Use of Cash

gekko2's picture
Rank: Senior Baboon | 226

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 (49)

Jan 14, 2010

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

Jan 14, 2010

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 use
AP -- because for dollars going out, you're delaying the payment -- hence source

what about the above?

Jan 14, 2010

additional uses: share buybacks, dividend payouts

Best Response
Jan 14, 2010

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)

    • 7
Jan 14, 2010

Perfect -- thanks everyone and thanks San Ford for the fundamental thinking.

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Jan 15, 2010

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

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 LBOs
if 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

but what if the cash (asset) is used to purchase equipment (asset). Use or source?

Nov 12, 2012


I'm making it up as I go along.

Nov 12, 2012

you include all transaction fees in the Uses as the sources are funding their payment as well... Conversely, you do not amortize the entire amount... typically only debt financing costs...

Nov 12, 2012

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

yup include legal fees, bank fees, consulting fees, sponsor fees etc.

you amortize the debt typically over it's life ie a 5 year loan sees a 5 year amortization of it's cost... It really depends how detailed you want to model it, individually per each asset or as a pool.

Nov 12, 2012

regardless of the fact that it's amortized, it's a cash expense and thus is a use of funds, amortization is a non-cash expense

Nov 12, 2012

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

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.

Nov 12, 2012

great thanks guys.

Nov 12, 2012

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

It sounds like the initial equity contribution will fully fund the project costs, thus the debt drawdown in year 2 will simply recapitalize the project and fund a distribution to equity.

I would show two S&U tables, one for the initial transaction and one pro forma for the recap.

    • 1
Nov 12, 2012

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).

    • 1
Nov 12, 2012

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.


Nov 12, 2012

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?

Nov 12, 2012

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?
New debt: $22.5
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

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

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

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

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.

Nov 12, 2012


Nov 12, 2012

Yes - this is relatively common and just another component of change in debt.

Nov 12, 2012

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?

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

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.

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

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.

Nov 12, 2012

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

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
scott hartnell:

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.

A steadfast way to get cut out of the broker business pipeline in its entirety.

Nov 12, 2012

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

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

Why the excessive closing cost figures?

Nov 12, 2012

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

Nov 12, 2012
Nov 12, 2012