CHAPTER 10: CASH FLOW – THE LIFE LINE OF BUSINESS

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Cash Flow from Financing Activities
Putting it all Together
Does Business Exist to Generate Profit?
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Cash Flow from Financing Activities

This cash flow shows the movement of cash due to a company’s financing activities. Financing activities include drawdown (inflow) and repayment (outflow) of bank borrowings, financing costs from loans, and dividend payment to shareholders.
 
Table 3 is extracted from TexCycle’s cash flow statement.
 

Putting it all Together
 
Table 4 is also a part of TexCycle’s cash flow statement. Table 4 combines the impact of all three categories of cash flow.
 

 
The net cash movement for financial year 2016 was a decrease of RM1,478,736. Taking into consideration the initial cash balance of RM7,145,512 and changes in exchange rate of negative RM289, the end balance of TexCycle’s cash & cash equivalents was RM5,666,487, which is in line with the number reported in the balance sheet (see page 83).

Let’s go back to the Malaysia Airports (“MAHB”) case earlier. Figure 1 shows the operating cash flow, financing cash flow, and purchase of property, plant & equipment (including costs of KLIA2) from 2010 to 2016.

There are a few observations. Firstly, unlike MAHB’s reported profit, which fell substantially in 2015 and 2016 (see table 2 in page 85, under Chapter 9: Balance Sheet – Measurement of Financial Health), MAHB’s operating cash flow shows continuous improvement. Secondly, during the construction of KLIA2, MAHB had to undertake financing for the construction, which explains the increase in the financing cash flow and purchase of property, plant & equipment. Once KLIA2 became operational, MAHB needed to start repaying the financing undertaken, which explains the financing cash flow turning negative.
 

 
Does Business Exist to Generate Profit?
 
I often ask, what is the purpose of a business? The standard reply I will get is that the purpose of business is to generate profit. Nothing can be further from the truth. The main purpose of a business is to generate cash, not profit. Allow me to illustrate this fact.

Let’s take the small traditional coffee shop owner. If we ask the owner how much profit he/she generates in a year, I doubt they’d know the number. But yet, they have been operating and surviving for decades. How is that possible? Let’s look at a simplified run through of the daily business operations. In the morning, when the owner opens the shop for business, let’s assume he/she places RM1,000 cash in the cash register.

Throughout the day, the shop receives payment for food and drinks, while paying suppliers (i.e. egg, bread, margarine, coffee powder, etc.).

At the end of the day, the owner will count the amount of cash in the cash register. If it’s more than RM1,000, then the business is good, as the business cash inflow is more than the cash outflow. If it’s less than RM1,000, then it’s a problem, as the business is paying out more cash than it receives.

As you can see from this, the most critical objective of a business is to generate more cash inflow then outflow.

Profit, on the other hand, is a product of accounting rules.

This concludes Chapter 10. In the next few chapters, we will explore ratios, starting with Profit Margins.