Help re:cash flow

te170381 Registered Posts: 26 Regular contributor ⭐

I am trying to get my head around the inital part of the cash flow statement.

The reconcilliation of operating profit.

I am probably being really thick, ive just got to do dfs, pcr and pev all in june, I fell like my heads about to explode!!!!

How do i know if I add the increase/decrease on or take it off.

Increase/decrease in debtors
Increase/decrease in creditors
Increase/decrease in Stock

I understand that i have to add the depreciation charge back on as it was taken off the operating profit figure.

If someone could explain the other three to me in lamens terms ill be well away.

Sorry if i sound thick!


  • peugeot
    peugeot Registered Posts: 624 Epic contributor 🐘
    Think about the impact increases in working capital have on your cash flow and decreases will have the opposite effect. An increase in debtors means that you have received less money this year from debtors, so this has to be deducted from operating profit as it is a failure to collect debt promptly so it is a cash 'outflow', i.e. a deduction from profit from operations.

    Increases in creditors mean that you have paid out less cash than the previous year, so paying suppliers more slowly will improve cash flow, thus an add-on to profit from operations.

    In terms of stock, if you think about the order of liquidity (stock, turns into debtors which turns into cash). Increases in stock therefore mean more cash is tied up in stock, hence increases worsen cash flow so it is a deduction from profit from operations.

    So if the movement from one year to the next worsens, you need to deduct, if it doesn't worsen the cash flow you won't need brackets.

  • Paul24
    Paul24 Registered Posts: 578 Epic contributor 🐘
    Cash Flows

    When I first started looking at cash flows, i used the following logic.

    Inventory increase means more money has been tied up in stock which is negative in terms of cash flow, hence it goes into the reconciliation as a (negative) figure.

    If trade payables has increased, more credit has been taken, therefore less cash has been sent out, which is positive in terms of cash flow, so goes into the reconciliation as a positive figure.

    I found this way helpful when starting out.

  • visha
    visha Registered Posts: 218 Dedicated contributor 🦉
  • kel524uk
    kel524uk Registered Posts: 27 Regular contributor ⭐

    Just a quick note thanks a lot Visha for ur tips on cash flow synched them this afternoon! now just consolidation to crack any tips for that :tongue_smilie:
Privacy Policy