Negative splitting in running terms means that your last lap was faster than your previous.

Good runners start slower and get faster as the race progresses.

I am notoriously bad at this. Starting fast then slowing down.

So, what do I do? Well, on my 9th 400, I slowed down my pace to 90 seconds.

So that on the 10th 400, I could hit 84 seconds.

Wallah. I negative splitted.

Cheating you may say. But, I think I deserve it.

Running a speed workout and negative splitting on the last lap is similar to working capital in financial modeling.

How do short-term investments (aka working capital) affect the value of a firm in a DCF?

Well, we know that the DCF values companies based on their stream of future cash flows.

So, an investment in the company would reduce the company’s cash flow in the year of the investment.

So, if the firm just makes an investment, then the value falls.

But, by definition, an investment is one that aims to generate returns in the future. So, the goal of the investment would be that the present value of the returns from investing outpace the present value of the investment.

But, in a DCF we do not project out an infinite number of years.

Because we do not have the ability to accurately predict so far.

So, we make an assumption of value after 5-10 years. Known as the terminal value.

And in that we assume a constant growth rate.

So if I wanted to increase the terminal value what would I do?

Well, I need to increase year 10 cash flows.

So, I go to year 9. My second to last lap (aka year).

Hike the time (aka the amount of working capital).

Then, I go to year 10. And slash time (aka the amount of working capital).

What happens? You get a cash inflow from working capital falling.

Now, year 10 looks a lot better.

Just like my 10th lap. Negative splits look cool.

The higher cash flow value in year 10 means that gets carried forward in your terminal value calculation.

Now, you have an inflated terminal value as well.

Congratulations. You have secretly increased the value of your firm.

Through negative splitting.

You didn’t cheat either. You deserve it.