Free Cash Flow and Dividends

[Gregg]

hi All, another newbie question, what is the working capital? usually it has to be deducted from operating cash flow become Net Op Cash Flow.

working capital often involves the 3 main items of inventory, trade receivables and trade payables.

To have a understanding of the working capital flow, when a company wants to sell a good it needs to own the good for sale. For retailers, the inventory comprises of items to be sold to the customer. For manufacturer, they involve the raw materials needed to produce a certain goods.

As the goods are not yet sold by the company, the company will not have the money to pay its supplier. This will then be booked under trade payable as it is not paid in cash yet.

When the company sold its product to the customers, it will then record a sale. Sometimes, it will collect cash upfront or it may allow the customer to buy on credit. In the case when the customer is buying on credit, it will be booked as trade receivables.

As the name of working capital suggest, it is something the company needs to maintain its operation. When inventory increases, trade receivables increase and trade payable decrease, working capital will be reduced as cash is being paid to hold on to inventory while it is not able to collect as much money back.

The main thing about cash flow statement is that it allows you to see the flow of cash in the company. A company reporting healthy profit might in fact be burning cash for capex and receivables and inventory. Cash flow is of course harder to manipulated though it is not entirely impossible. For income statement, all you need is to change the policy of recognition of revenue or to capitalise certain expenses and you get a higher profit.

Here's a satire written by Benjamin graham on how to increase profit of the company

Thanks for your explanation....