Cash Flow · Working Capital
Cash Flow & Working Capital
What is cash flow?
- Profit and cash arrive at different times
- Working capital = receivables + inventory − accounts payable
- The faster you grow, the more cash gets tied up
Looking at cash flow separately means your meeting materials change. A management meeting that used to see only month-end P&L now also gets a 13-week cash schedule, and when sales brings in a contract, the payment terms are written next to the win amount. The point of the concept is that the moment you set a revenue target, you also calculate how much cash it takes to carry that revenue. If a company with KRW 10 billion (≈ US$7,481,700) in annual revenue has working capital of 20% of revenue, or KRW 2 (≈ US$1) billion, growing revenue to KRW 15 billion (≈ US$11,222,500) means another KRW 1 billion (≈ US$748,200) gets tied up in receivables and inventory. A growth plan that doesn’t say where that money comes from isn’t a plan. It’s a hope.
The cash flow statement has three parts: operating, investing, and financing. If operating cash flow has been negative for several quarters while borrowing and equity raises keep the company afloat, it signals that the core business is not generating cash. A common slip in practice is treating EBITDA as cash. You still have to subtract the increase in working capital, interest, corporate tax, and capital expenditure to get what actually stays in the bank. The cash conversion cycle is days sales outstanding (DSO) plus days inventory outstanding (DIO) minus days payables outstanding (DPO). Parts manufacturers commonly sit in the 90–120 day range, while retail and restaurants with many cash sales can even see a negative CCC. So even the same 30-day reduction only means something when read against your industry baseline and your own three-year trend.
The most common misconception is that a cash shortfall can simply be covered with a credit line. An overdraft doesn’t fix the working capital structure; it’s the cost of keeping that structure in place, and the faster revenue grows, the faster the limit fills up. The second misconception is improving CCC by stretching payment terms. Pushing supplier payments from 60 to 120 days improves the metric, but it comes back as higher unit prices and lower priority on deliveries, and it may even violate the 60-day payment requirement under Korea’s Subcontracting Act. Cutting inventory across the board also brings stockouts and expedited freight costs. That is how you end up with better metrics and a shrinking operating margin.
Eunpyo HongExpert in company analysis, startups, and startup fundraising
Okgum LeeExpert in company analysis, fundraising, and business planningSince the 1980s, the cash flow statement has been a required financial statement under international accounting standards, added to make up for the limits of accrual-basis profit.
Consider a hypothetical case. Company A makes industrial valves, with 62 employees and annual revenue of KRW 18 billion (≈ US$13,467,000). Revenue grew 40% over three years, yet cash got tighter every month, and it had drawn KRW 1.2 billion (≈ US$897,800) of a KRW 1.5 billion (≈ US$1,122,300) overdraft line. Operating profit on the income statement was positive all three years.
- When the finance lead put the last eight quarters of profit and operating cash flow on a single page, cumulative operating profit was KRW 1.4 (≈ US$1) billion, while operating cash flow was KRW 100 million (≈ US$74,800) negative, and most of the gap was receivables and inventory.
- When collection days were pulled by customer, two of the top five accounts turned out to pay on 120-day promissory notes. The head of sales pushed back: “Those two are 30% of our revenue, and if we touch their terms, the volume goes away.”
- The CEO made it clear: “This year, incentives will be tied to collections, not revenue.” Collection rate now counts for 40% of sales bonuses, and a 30% advance-payment clause was added to the standard new-contract template.
- The purchasing manager identified KRW 900 million (≈ US$673,400) of inventory that hadn’t moved in over six months and sold KRW 300 million (≈ US$224,500) of it at half price. For key materials, they switched from one large monthly order to small weekly orders.
- Nine months later, DSO had fallen from 78 to 59 days and inventory days from 96 to 71, cutting the CCC from 134 to 92 days. The KRW 2.1 billion (≈ US$1,571,200) in cash this freed up paid off the entire KRW 1.2 billion (≈ US$897,800) overdraft.