04. Why a profitable company can run short of cash

Hanbit Tools reports net income of 28.8 while operating cash flow is −3.2. Neither number has to be wrong. The company sold on credit and financed inventory before collecting all its customers' payments. Amounts are KRW million.

Follow the money tied up in operations

For this exercise, operating working capital means receivables plus inventory minus trade payables. It excludes cash, bank debt, and other accounts. This is our explicit analytical definition, not a claim that every data provider uses the same measure.

At the start, all three operating balances are zero. At year-end, working capital is 50 + 10 − 20 = 40. Customers still owe 50 and unsold goods account for 10, while suppliers are financing 20 through unpaid invoices. The net 40 has absorbed cash.

Bridge profit to operating cash

Depreciation is added back because it reduced profit without being an operating cash payment in that period. Equipment acquisition appears separately in investing cash flow. IAS 7 describes this adjustment-based approach.¹

The direct calculation confirms it: collect 150, pay suppliers 110, operating expenses 30, interest 6, and tax 7.2. The result is again −3.2. Interest and tax are treated as operating payments in this fictional example; verify classifications in an actual report.

Negative cash flow needs an explanation

If the remaining 50 is collected shortly after year-end without offsetting outflows, the cash balance improves. However, that subsequent collection does not change the historical first-year cash flow. If customers delay or default, the same receivable balance points toward a different problem.

Growth can also keep consuming cash even when customers eventually pay. A distributor selling more tools on similar credit terms may need larger receivables and inventory each year. Ask whether cash absorption reflects deliberate expansion, worsening collections, or both. Extending supplier payments improves current cash flow but may simply move the pressure into the next period.

One useful exercise is to compare receivable growth with sales growth across several periods and then inspect payment terms and overdue balances. Avoid declaring misconduct solely because the two growth rates differ. Acquisitions, seasonality, and reporting boundaries can also affect the comparison.

Practice locating the reported cash figure

Apple's fiscal 2025 Form 10-K reports cash generated by operating activities of USD 111,482 million.² Locate it in the cash flow statement rather than substituting net income or a presentation slide's adjusted measure. Then follow the reconciliation above that line. This is a reading exercise, not a claim that Apple's working capital model resembles Hanbit's.

Keep a short record

Write three lines: reported profit, reported operating cash flow, and the two largest reconciling items. For Hanbit, receivables and inventory absorb cash while trade payables provide part of the funding. Before calling the company cash rich, the next chapter will compare that cash with debt maturities.

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Footnotes

1. IFRS Foundation, IAS 7 Statement of Cash Flows. Indirect operating cash flow adjustments. ↩

2. Apple, 2025 Form 10-K. Consolidated Statements of Cash Flows, printed page 33; amounts in USD millions. ↩