A project has THB 1 million in revenue and THB 700,000 in direct costs, leaving a THB 300,000 spread. But if the company collects only THB 600,000 this period and has already paid all those costs, where will the other THB 100,000 come from?
That is where I would start learning corporate finance. How much a project leaves after costs, when its cash arrives, and how to fund the wait need to be considered together.
Every example in this episode concerns fictional Company A, which sells business systems, implementation, and annual service plans. These are not my company's or a customer's results. We will follow the business from spending decisions to project appraisal and valuation, without beginning with a long list of formulas.
What decisions does corporate finance help us make?
Imagine a company with limited cash and staff. It could buy equipment, hire people, develop a service, or preserve cash for work already promised. Each option consumes resources, and choosing one may mean giving up another.
Corporate finance helps organize the reasoning behind those choices. I would begin with three questions.
What should the company invest in? An investment might be machinery, a business system, a customer project, or service development. Assess the additional benefits against the money, time, and risk involved. A purchase looking modern or increasing sales is not enough by itself.
Where should the money come from? The company could use existing funds, borrow, or raise equity. Each source carries costs, conditions, and different rights. Debt has repayment obligations. Shareholder funding brings expectations and ownership consequences; it is not costless just because no interest invoice arrives.
What should happen to the money left over? Reinvesting, retaining a buffer, and returning funds to shareholders require a view of investment opportunities, available cash, uncertainty, and the restrictions that apply. The bank balance alone does not establish how much can be distributed.
Working capital connects these questions to daily operations. An attractive project still needs funding while the company waits for collection. Advance receipts may come with future service obligations, so they are not all spare cash for a new venture.
OpenStax's introduction to business finance covers working capital, long-term investment, and capital structure. Aswath Damodaran's corporate finance materials connect investment, financing, distributions, and valuation. This learning series arranges those topics for people managing a business.
How can a THB 300,000 spread coexist with negative project cash flow?
Return to Company A. Assume the project meets the requirements to recognize THB 1,000,000 in revenue this period and incurs THB 700,000 in direct costs in the same period. All those direct costs have been paid in cash. The customer pays only THB 600,000 this period, leaving THB 400,000 uncollected.
The example excludes overhead, depreciation, taxes, interest, capital spending, and all other receipts and payments. We therefore need two calculations.
Revenue less direct costs = THB 1,000,000 − THB 700,000 = THB 300,000.
Collections less direct costs paid = THB 600,000 − THB 700,000 = −THB 100,000.
The first figure is a spread after direct costs, not net profit. The second is the net cash movement from only the project items specified here. It is not the company's complete operating cash flow as presented in financial statements.
With THB 500,000 in opening cash and no other transactions, closing cash is THB 500,000 + THB 600,000 − THB 700,000 = THB 400,000. The company can pay the costs, but cash falls by THB 100,000 even though the project's direct-cost spread is positive.
If the customer pays the remaining balance next period, the company collects cash from an amount already recognized. It does not recognize the same revenue again simply because payment arrives. Distinguishing revenue recognition from collection will be essential when we study financial statements.
The IFRS Foundation's IAS 7 overview distinguishes operating, investing, and financing cash flows. Our short cash example teaches the distinction; it does not replace complete financial statements or determine which accounting framework a particular company must use.
An attractive project and a funded project require different checks
- Recognised revenue1,000
- Direct cost−700
- Collected600
- Costs paid−700
- Opening cash500
- Closing cash400
If revenue and costs follow the plan, a project with a positive spread may still require funding during the collection gap. The company might negotiate payment milestones, phase purchases, or arrange funding suited to that interval, subject to contracts and applicable restrictions.
If a service repeatedly costs more to deliver than it earns, additional funding can buy time. Pricing, scope, or delivery costs still need attention. A lender's willingness to provide money does not establish that the project is worthwhile.
Spending as little as possible is not always the best choice either. Cheaper equipment may create defects and rework. Not training a backup may prevent delivery when a key employee is unavailable. Compare consequences across the period in which the company will bear them.
I would therefore connect long-term value with the cash the business expects to generate, its timing and risk, and the resources required. One period's accounting profit is part of the evidence, but it cannot settle every investment decision. Later episodes will compare money at different dates through assumptions that others can inspect, rather than treat a calculated value as an infallible prediction.
The CEO need not calculate every cell personally. They should be able to ask what the alternatives are, how much cash goes out before money arrives, which assumptions change the decision, and who can approve it. Financing and distributions must also respect authority, contracts, and applicable law, rather than personal preference alone.
Try answering before reaching for a calculator
What changes if Company A collects THB 900,000 this period instead of THB 600,000, with the same revenue and direct costs?
The spread remains THB 300,000. Net project cash movement becomes THB 900,000 − THB 700,000 = THB 200,000. Opening cash of THB 500,000 rises to THB 700,000, assuming no other transactions.
Does borrowing THB 100,000 increase the project's spread?
No. Borrowing increases cash and creates a financing obligation; it is not revenue from selling the work. Interest and fees need separate consideration when the relevant information is available.
Does closing cash of THB 400,000 mean the company can immediately distribute it to shareholders?
There is not enough information. Consider upcoming obligations, cash needed to finish work, an appropriate buffer, investment opportunities, and the distribution rules that apply. A bank balance does not answer all of those questions.
Before the next episode, choose one spending decision under consideration. Write down what the spending will create, when payment is due, where the expected cash benefit comes from, and what you would do if it arrives late. The financial-statement episode will help trace those numbers through the accounts while keeping revenue, profit, and cash distinct.