A company grows sales from 1,200 to 1,500 and profit from 120 to 150. Same margin, 25 percent more business.
In the same year its customers move from paying in 60 days to paying in 120. Receivables at year end go from 200 to 500.
The income statement records the sale when the goods ship. The cash arrives when the customer pays. The extra 300 sitting in receivables is revenue already counted and cash not yet collected.
Working capital, IAS 7
Profit up, cash down
Year 1, paid in 60 days
Year 2, paid in 120 days
revenue counted, cash not yet collected
Illustrative. All costs paid in cash, no other working capital movements.
| Line item | Year 1 | Year 2 |
|---|---|---|
| Revenue | 1,200 | 1,500 |
| Profit | 120 | 150 |
| Days to collect | 60 | 120 |
| Receivables at year end | 200 | 500 |
| Increase in receivables | 0 | -300 |
| Operating cash flow | 120 | -150 |
Illustrative case, round numbers. Simplified: all costs paid in cash, receivables stable in year 1.
Profit is up 30. Operating cash flow goes from plus 120 to minus 150.
Nothing in the income statement shows it. The cash flow statement does, in one line: change in trade receivables.
Profit says the company sold more. Cash says who is financing the customers.