Chapter 5
FINANCIAL ANALYSIS : Walking through from earnings to cash flow

The first step in the process of moving from the income statement to a cash flow perspective is to recreate operating cash flows. The only differences between operating receipts and operating revenues and between operating costs and operating payments are timing differences related to payment terms (deferred payments) and changes in inventories (deferred charges).

The change in operating working capital accounts for the difference between operating cash flow and the generation of wealth within the operating cycle (EBITDA).

For capital expenditures, there is no direct link between cash flow and net income, since the former records capital expenditures as they are paid and the latter spreads the cost of capital expenditures over their whole useful life.

From a financing standpoint, the cash flow statement does not distinguish between capital and remuneration related to sources of financing, while the income statement shows only returns on debt financing (interest expenses) and corporate income tax.

Net income should normally appear in “cash at hand”, along with certain non-cash charges that together form cash flow. Cash flow may be translated into an inflow or outflow of cash only once adjusted for the change in operating working capital to arrive at cash flow from operating activities in a broad sense of the term.

Lastly, factoring in the investment cycle, which gives rise to outflows sometimes offset by fixed asset disposals, and the equity financing cycle, we arrive at the decrease in net debt.