Cash Flow Analysis

The question: where did the cash go in a profitable year?

Synthetic Example Company reports a profit in each annual forecast. The apparent contradiction is 2027: revenue grows, net income is positive, and the company borrows another 500, yet cash falls. Amounts below are EUR thousands; the model has no other transactions, distributions, non-cash adjustments or revolver drawings.

Opening 2026 balances are cash 1,200, receivables 1,000, inventory 800, PP&E 5,000, payables 800, debt 3,000 and equity 4,200. For 2026 / 2027 / 2028, use revenue 10,000 / 12,000 / 13,200; COGS 6,000 / 7,800 / 8,580; overhead 2,000 / 2,400 / 2,904; depreciation 500 / 700 / 900; capex 500 / 1,800 / 1,500. Closing receivables are 1,000 / 1,800 / 2,200, inventory 800 / 1,600 / 2,000, payables 800 / 1,040 / 1,144 and debt 3,000 / 3,500 / 3,500. Tax is 25% of positive EBT and interest is 5% of opening debt. Other balances are zero.

Reconcile 2027 earnings into operating cash

Revenue of 12,000 less COGS 7,800 and overhead 2,400 gives EBITDA of 1,800. Less depreciation 700 gives EBIT of 1,100; less interest 150 gives EBT of 950. Tax of 237.5 leaves net income of 712.5.

Add back the non-cash depreciation of 700. Receivables rise from 1,000 to 1,800, consuming 800 cash; inventory rises from 800 to 1,600, consuming another 800. Payables rise from 800 to 1,040, releasing 240. The net working-capital cash effect is −800 − 800 + 240 = −1,360.

CFO is therefore 712.5 + 700 − 1,360 = 52.5. Profit is positive, but most pre-investment cash generation is tied up in operating balances. Working Capital explains the balance changes; the Working Capital Model builds the customer, stock and supplier assumptions.

Separate investment from financing

Capex of 1,800 gives investing cash flow of −1,800, with no disposals or other investments. Debt rises by 500, so financing cash flow is +500, with no repayments, equity issues or dividends. New borrowing adds cash but does not improve operating cash flow or profit.

Cash change is 52.5 − 1,800 + 500 = −1,247.5. Opening 2027 cash is the prior year’s closing 2,212.5, so closing cash is 2,212.5 − 1,247.5 = 965. PP&E separately rises from 5,000 to 6,100: 5,000 + 1,800 − 700. The Capex Model connects investment payments with the asset plan.

CFO less capex is −1,747.5. That is the model’s levered Free Cash Flow, after modeled cash interest and tax and before financing flows. The additional borrowing makes the fall in cash smaller; it does not turn free cash flow positive.

Reproduce the linked cash bridge

Create a blank annual EUR model in thousands, starting in 2026, with zero actual years and three forecast years. In Advanced mode enter the opening balances and annual amounts above. Use positive input amounts for costs, depreciation and capex, gross margins of 40% / 35% / 35%, tax of 25% and interest of 5% of opening debt.

Read the indirect Cash Flow statement for net income, depreciation addback and changes in receivables, inventory and payables. Compare CFO, capex, debt issuance and closing cash with the Income Statement and Balance Sheet. Opening cash for each later year is the preceding closing balance, not a second cash input. The model link opens your model; it does not import this exercise.

Diagnosis and interpretation limits

This profitable year has weak operating cash conversion and an investment requirement well above CFO. Borrowing partly fills the gap, but cash still falls. This diagnosis separates operations, investment and financing rather than treating every cash movement as business performance.

Annual totals do not show intrayear payment dates or minimum cash needs. This example does not separate maintenance from growth capex or prove receivable collectability. For the underlying accounting links see Three Financial Statements; for assumptions and scenarios see Financial Model Analysis. Financial Ratio Analysis relates this cash diagnosis to leverage and returns.