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#10 “Free Cash-Flow Management” Jan, 2010

In the latter half of FY 2008, Nissan, like other global companies, faced three challenges- the financial crisis, severe economic downturn and volatile exchange rates. However, Nissan continued investing and developing its brand, products and technologies, so that the company would be prepared for the post-crisis period and future.

Nissan focused on free cash-flow management to address not only the current economic climate but also the major shifts occurring in the automotive industry, as a result of global environmental issues.


Part 1: What is Free Cash Flow?

The statement of cash flows is one of three financial statements, along with the balance sheet, the income statement. The cash flow statement reports the cash receipts and payments of a company during a period.

As the cash flow statement reports the usage and generation of cash, balances do not change when a sales contract is made. Figures change only when cash is actually paid or received, as shown in red below. Even if a company reports profit on the income statement, there is a possibility that it cannot survive due to insufficient levels of cash. To identify these risks, the cash flow statement is important.

The cash flow statement consists of three different activities as noted below:

(1)Cash flow from operating activities
- Cash provided by operations (the excess of cash receipts over payments), a company's core activities.
Cash expenditures
ex.) Payment for the purchased cost of parts used in vehicle production/ payment of employee salaries.
Cash receipts
ex.) Receiving payment from the sale of vehicles and replacement parts.

(2)Cash flow from investing activities
- Cash provided by or used in investing activities including the sale of assets.
Cash expenditures
ex.) Payment for the purchase of facilities used in vehicle production.
Cash receipts
ex.) Payment from the sale of facilities and real estates, no longer in use.


(3)Cash flow from financing activities
- Cash provided by or used in financing activities including debt raised and repaid for operating and investing activities.
Cash expenditures
ex.) Debt repayment/ bond redemptions / dividend payments.
Cash receipts
ex.) Increased borrowings/ fund raising from bond issuance.


Of these three activities, the combined total of "(1) Cash flow from operating activities" and "(2) Cash flow from investing activities" constitute "Free Cash Flow".

A positive free cash flow means that a company is able to raise the necessary funds for investment through its own operating activities. Furthermore, the company is able to repay debt and pay dividends with excess cash. In contrast, when free cash flow is negative, a company is unable to raise the necessary funds itself. As a result, the company may need to incur additional debt through loans or bond issuances to cover their investment needs. If free cash flow remains negative for the long term, a company's fundraising ability will be limited. Therefore, the company may have to forego necessary investments, which in turn could negatively impact its future competitiveness.


Part 2: Nissan Focus on Free Cash Flow Management

As previously mentioned, Nissan, along with the automotive industry, faces three major challenges:

- Financial crisis
...Limited fundraising options, along with increased funding costs.
- Severe economic downturn
... Sharp reductions in sales and average selling prices.
- Volatile exchange rate
... Due to the appreciation in the Japanese yen, sales of Japanese exports in overseas markets have decreased. Furthermore, values are diminished, when profits (based in foreign currencies) from overseas subsidiaries are converted to yen.

Cash flow from operating activities decreased due to the severe economic downturn and pressure on sales and profit resulting from fluctuating exchange rates. Despite these severe conditions, the company continues to invest in emerging markets and environmentally-related projects, as demand in these areas are expected to grow in the future. Accordingly, expenditures exceed income and it is challenging to achieve a positive free cash flow position. However, the company cannot continue with a negative free cash flow position over the long term, given the current financial climate and difficultly in raising funds.

If Nissan fails to respond, as stated in Part 1, the company will have little choice but to sacrifice its future and reduce its investment in integral projects such as the environment and emerging markets. Therefore, Nissan is committed to its focus on free cash flow management, as evident in various measures.

Nissan's business is comprised of the automotive division and sales finance division. Generally, the automotive business is responsible for the manufacturing and sale of vehicles. The sales finance business generates interest income and supports automobile sales by offering consumer financing, including automobile loans and leasing, to the car buying public.

At the end of FY 2008, the asset values for the automotive division and sales finance division were approximately 5.6 trillion yen and 4.6 trillion yen, respectively. Major assets in the automotive business include manufacturing facilities, raw materials and completed products. Assets for the sales finance business consists mainly of customer loans and leased vehicles. Assets in each business differ widely.

The sales finance business is essential for the automotive industry as it assists customers purchase cars through financing. As previously explained, both businesses are considerably different in content and assets are, often times, managed separately. Therefore, the explanation on free cash flow, in the next section, is specific to Nissan's core business, the automotive business.


-Extracts from FY 2008 Financial results document (Kessan Tanshin)-


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