Financial Statement Analysis
Profit versus cash
How can a profitable business run short of cash?
A sale can count as revenue before the customer pays. Inventory can use cash before it becomes an expense.
Operating cash flow ≈ profit + noncash charges − increase in operating working capital
Begin with profit, reverse noncash charges, then remove cash tied up in operating working capital. ₹100 + ₹20 − ₹60 = ₹60 here.
₹100 profit plus ₹20 depreciation minus ₹60 more receivables yields ₹60 cash flow, holding other items constant.
Begin with profit, reverse noncash charges, then remove cash tied up in operating working capital. ₹100 + ₹20 − ₹60 = ₹60 here.
Customers owe ₹30 more at year-end, all else equal. What happens to operating cash flow relative to profit?