the statement of Cash Flow : A Document Synthetising All the Firm Decisions

Operating decisions => Operating activities => Operating Cash Flow

Net profit after taxes (PAT) + Depreciation = Internally generated funds (IGF) ./. increase in WCR or + Decrease in WCR = Operating cash flow (OCF)

The Operating cash flow (Cash flow provided by operations) is a central and

crucial concept for financial management.

It mesures the ability of the the firm to generate, through its day-to-day operations, a flow of cash, and therefore evaluates its capacity for survival and for long term growth

If it is low (or worse, negative) over a certain period of time,

• it shows the inability of the the company to meet its financial obligations and
• to make the necessary Capex required to operate efficiently and produce funds for future periods.

The OCF is the long term engine of the company.

Click here to see the source of data

Starworld Group	2021	2022
Profit after Tax	450	715
Depreciation	350	400
IGF	800	1115
Variation of WCR	- 18	- 102
Operating Cash Flow	782	1013

What are the reasons If OCF < IGF :

1. the accounts receivables have increased due to problems faced by our customers
2. the inventories might have gone up because of difficulties in the marketplace

For example If (IGF - WCR) = -300 :

1. that means that you have to find outside ressources
2. and this before talking about strategic expenses such as new investments and financial obligations

The OCF is the basic and fundamental source of cash for the investment and financing policies of the company. The higher it is, the better it is, the more freedom and flexibility it gives to the firm to build its LT strategy without constraint and interference from finance.

The optimization of OCF means 2 things :

1. Optimization of the IGF, through increased profitability and
2. Efficient management of the WCR

a. through inventory management
b. credit policy management and
c. suppliers' payment management.

Strategic decisions => Investing activities

New Capital expenditures (capex)	M & A
Sale of fixed assets	Alliances
Purchase of other fixed assets	Joint venture
Divestiture & Liquidation	Licensing

Strategic decisions => Financing activities

- Repayment of Long Term debt + New Long Term borrowing + Issue of shares - Repurchase of shares - Dividend (Net profit - Retained earnings)

Synthesis

Operating cash flow + / - Investing activities = Cash flow available (or needed) after investing activities + / - Financing activities = Cash flow available (or needed) after financing activities + Net change in short term debt Net change in marketable securities and other short term investments Net increase (or decrease) in cash

 

Statement of Cash Flow of Starworld Group

Click here to see the source of data

2021 2022 Profit after Tax 450 715 Depreciation 350 400 IGF 800 1115 Variation of WCR - 18 - 102 Operating Cash Flow 782 1013 Capital Expenditure (Capex) - 715 - 570 Total of investing activities - 715 - 570 Cash flow available (or needed) after investing activities 67 443 Repayment of LT debt 0 - 50 LT debt borrowing + 50 0 Issue of shares + 200 0 Dividend - 345 - 570 Total of financing activities - 95 - 620 Cash flow available (or needed) after financing activities (var. NCP) - 28 - 177

 

Sources :

Understanding Financial Statements, 1999, Marc Bertonèche, Ph. D. in Finance from the Northwestern University, Professor at the Bordeaux University and at Sciences-PO Paris, Visiting Professor at Harvard Business School and Oxford University.

Corporate Finance Course, Bernard Jaquier, Professor in Economics & Finance, Lausanne, Switzerland, 2023