Money is in the bank. How much can leave?
At the end of year 3, the hypothetical project produces THB 650,000 of cash flow. That number can make a distribution look straightforward. Yet THB 200,000 is recovery of working capital committed at the start, and THB 450,000 is the forecast operating cash for that year. Neither component establishes a legally distributable dividend.
I would start a payout discussion by asking which cash is genuinely available after obligations, rather than choosing a percentage of the bank balance. A business can show a profit and still need money for collection delays. It can also have cash because it borrowed, received a customer advance, or has payments coming due.
This chapter addresses three competing uses of cash: keep it available, reinvest it, or return it to owners. The worksheet is my proposed management process for the fictional case. It is not a legal test for dividends or a rule that every company must hold the same reserve.
Cash capacity and permission to distribute are different questions
First ask whether the business can make a payment without missing other obligations. Then ask whether that particular distribution is permitted. The second question depends on the entity, its governing law, financial statements, approvals, financing agreements, and other applicable restrictions. A positive free-cash-flow number does not answer all of them.
The IFRS Foundation's IAS 7 overview distinguishes operating, investing, and financing cash flows. That classification helps explain where cash came from. It is not a company-law certificate that a balance may be paid to shareholders.
For the same reason, retained earnings and money in a bank account are not interchangeable descriptions. One is an accounting balance; the other is a cash resource. Neither can be substituted for the checks governing an actual distribution. Obtain the appropriate accounting and legal review for the entity rather than importing a foreign textbook's rule.
Separate committed payments from choices
| Question | Evidence to collect | Decision it informs |
|---|---|---|
| What cash is usable? | Bank records, restrictions, customer advances and timing | Start with resources available for the proposed payment |
| What must be paid? | Payroll, suppliers, tax, debt and contractual dates | Cover committed obligations without counting them twice |
| What uncertainty remains? | Collection delays, operating incidents and downside forecast | Set a reasoned liquidity buffer |
| What deserves reinvestment? | Incremental cash flows, risk, required return and delivery capacity | Compare projects and the option not to invest |
| What can be returned? | Residual cash plus legal and agreement checks | Consider amount, timing and permitted method |
These rows are categories of work, not amounts to subtract mechanically. If payroll is already included in an operating forecast, deducting the same payroll again would understate available cash. If a proposed investment forecast already includes working capital, putting the same amount into a separate allocation again would also double count it.
Reserve calculations need a similar boundary. A liquidity buffer is money retained for uncertainty, not an expense created merely by labeling it a reserve. Accounting provisions and statutory reserves have their own meanings. The worksheet should state which concept is being used.
Debt maturities, tax, payroll, contracts and approval authority.
Stress-test delayed receipts and higher outflows.
Review value, risk and execution readiness.
Check legal, contractual and approval conditions and the ability to pay.
Retaining money needs a reason too
A business should not retain all cash simply because growth sounds desirable. A reinvestment proposal needs an explanation of what changes relative to not investing, what resources it consumes, and why its expected return compensates for its risk. An attractive market does not make every expansion in that market attractive.
Damodaran's corporate finance framework connects the return-of-cash decision to the availability of worthwhile investments. I use that connection as a question: if management keeps the money, what will it do with it, and when will owners be able to review the result?
Keeping a buffer can be a defensible use even without a named acquisition. The explanation should identify the exposure it covers and the trigger for revisiting it. “For future opportunities” on its own gives neither an owner nor a date for the decision.
Returning cash also has tradeoffs. It can reduce idle funds, but a business that distributes first and then urgently seeks expensive funding has created another cost. That possibility does not prove distributions are wrong; it means payout timing belongs beside the funding and investment plans.
FCFE helps frame capacity, not an automatic payment
Free cash flow to equity, or FCFE, measures cash after operating needs, reinvestment, and the relevant net debt cash flows. It can differ from actual dividends. A company may retain cash for future needs, use a steadier payout pattern, or face restrictions. The definition must be applied consistently rather than inferred from net income alone.
Damodaran's FCFE notes explicitly distinguish cash that could support distributions from dividends actually paid. We will use FCFE in the next chapter for valuation. Using it there does not establish the lawful dividend for a specific company today.
Exercise: can all THB 650,000 be paid out?
The project's final-year cash is THB 650,000, comprising THB 450,000 of forecast operating cash and THB 200,000 of working-capital recovery. A director proposes returning the whole amount to shareholders because the project has ended. What is missing?
Answer: the company-wide position. We still need financing obligations, other committed payments, usable cash, restrictions, approved reinvestment, uncertainty, and the applicable distribution requirements. The THB 200,000 recovery releases earlier committed cash; it is not new operating revenue. The project forecast is also not the company's retained-earnings calculation.
A useful decision can therefore be “defer the amount until these checks are complete,” with named owners and a review date. That is more informative than calling every uncertain balance unavailable forever. The purpose is to make a supported allocation, not to defend either permanent retention or immediate distribution.