Cash Flow
3 sections of a cash flow
● Operating activities
● Financing activities
● Investing activities
Operating activities
Main income activities of the company & most significant indicators of company’s success
➔ Net profit before Tax
➔ Eliminations
➔ Working capital
Investing Activities
Actual establishment of the infrastructure of a company for it to be in a favorable income
position
Non-current assets
➔ Investing in land & buildings
➔ Fixed deposit
Financing Activities
Find the infrastructure of the company and usually used to pay for investing activities
➔ Ordinary Share Capital
➔ Loan
How to identify what goes where
Operating Activities:
Cash generation from operations
- Can’t include depreciation & interest on loans under cash generation from operations
- Why? Depreciation is not an actual outflow of cash & interest expense goes under
financing the business
Note:
1. Profit before tax
2. Eliminate depreciation and interest expense (add them back)
3. Working capital (inflow or outflow)
❏ Inventory
❏ Debtors
❏ Creditors
End of note.
4. Subtract interest paid (finance costs)
5. Subtract tax paid
6. Subtract dividends paid
This will give you cash flow from operating activities total
NB: Interest on borrowed money is ‘added back’ eliminations then ‘deducted’ in interest paid
TAX, DIVIDENDS & INTEREST NOTES
3 sections of a cash flow
● Operating activities
● Financing activities
● Investing activities
Operating activities
Main income activities of the company & most significant indicators of company’s success
➔ Net profit before Tax
➔ Eliminations
➔ Working capital
Investing Activities
Actual establishment of the infrastructure of a company for it to be in a favorable income
position
Non-current assets
➔ Investing in land & buildings
➔ Fixed deposit
Financing Activities
Find the infrastructure of the company and usually used to pay for investing activities
➔ Ordinary Share Capital
➔ Loan
How to identify what goes where
Operating Activities:
Cash generation from operations
- Can’t include depreciation & interest on loans under cash generation from operations
- Why? Depreciation is not an actual outflow of cash & interest expense goes under
financing the business
Note:
1. Profit before tax
2. Eliminate depreciation and interest expense (add them back)
3. Working capital (inflow or outflow)
❏ Inventory
❏ Debtors
❏ Creditors
End of note.
4. Subtract interest paid (finance costs)
5. Subtract tax paid
6. Subtract dividends paid
This will give you cash flow from operating activities total
NB: Interest on borrowed money is ‘added back’ eliminations then ‘deducted’ in interest paid
TAX, DIVIDENDS & INTEREST NOTES
