Sales rise 25%, net profit from THB 10.4 million to THB 12.4 million, and year-end cash from THB 4 million to THB 6 million. The company sounds more liquid. Yet operating cash flow falls from THB 12.4 million to THB 11.4 million.
That difference is where a useful financial review begins. We need to find where profit takes longer to become cash, what investment the company made, and where the higher closing cash came from before deciding whether to speed collections, reduce inventory, change contract terms, or secure financing.
The final article uses the same hypothetical equipment seller, systems installer, and support provider. Amounts are THB millions, with equal 12-month years 1 (Y1) and 2 (Y2). “Cash pressure” here means cash from operations and cash left after investment have fallen. It does not establish a debt default; we lack a complete daily receipts-and-payments schedule and due dates.
Separate observations from explanations
| Item | Y1 | Y2 | Next question |
|---|---|---|---|
| Revenue | 100.0 | 125.0 | Which work and customers drove growth? |
| Gross margin | 40.0% | 38.4% | How did price, cost, and work mix change? |
| Net profit | 10.4 | 12.4 | When does the added profit turn into cash? |
| CFO | 12.4 | 11.4 | Which operating balances used more cash? |
| Year-end cash | 4.0 | 6.0 | Did the increase come from work, borrowing, or lower dividends? |
| ROE for common shareholders | 40.78% | 41.33% | How did profit and the equity base each contribute? |
| RNOA on the main classification basis | 30.38% | 30.64% | How did NOPAT and NOA turnover change? |
Higher receivables alone do not prove the collections team slowed down. More revenue may have arrived late in the year or credit terms may have changed. Higher contract assets may reflect planned delivery timing or pending acceptance conditions. Open supporting information before assigning an owner to fix either.
What the statements do establish is that receivables rise from THB 16 million to THB 22 million, inventory from THB 10 million to THB 13 million, and contract assets from THB 6 million to THB 9 million. These balances use cash during the period; causes and expected conversion dates need investigation.
Reconcile net profit to cash from operations
Net profit does not record every cash movement when it occurs. Start with profit, add back depreciation that did not use cash in the period, then adjust changes in operating assets and liabilities.
| Item | Y1 | Y2 |
|---|---|---|
| Net profit | 10.4 | 12.4 |
| Add depreciation | +5.0 | +6.0 |
| Increase in trade receivables | −4.0 | −6.0 |
| Increase in inventory | −2.0 | −3.0 |
| Increase in contract assets | −2.0 | −3.0 |
| Change in prepaid expenses | 0.0 | 0.0 |
| Increase in trade payables | +2.0 | +2.0 |
| Increase in accrued operating expenses | +1.0 | +1.0 |
| Increase in customer advances | +2.0 | +2.0 |
| CFO | 12.4 | 11.4 |
Y2 net profit plus depreciation is THB 18.4 million. Growing current operating assets use THB 12 million, while payables, accrued expenses, and customer advances rise by THB 5 million, giving a net THB 7 million working-capital use and leaving CFO of THB 11.4 million.
CFO/net profit falls from 1.19 to 0.92. That calls for a timing check, not an automatic verdict on earnings quality. Growth can consume working capital. Test whether cash use supports the work and can be recovered as planned.
Trace profit to CFO with signs for cash effects
From net profit, adjust noncash items and operating balances, THB millions
Separate panel scale: −15 to +15 THB million
Positive signs raise CFO; negative signs reduce it. Prepayments are unchanged, so their adjustment is zero.
Start with net profit
Add depreciation
Less added trade receivables
Less added inventory
Less added contract assets
Add higher equipment payables
Add higher accrued expenses
Add higher customer advances
Reconciled result, not another item to add
Separate panel scale: −15 to +15 THB million
CFO
Separate billed receivables from work with remaining conditions
Y2 recognizes THB 125 million revenue, while contract assets rise THB 3 million. The model therefore has THB 122 million credit billings. Subtract the THB 6 million rise in trade receivables, then add THB 2 million more customer advances for future work, to get THB 118 million total customer receipts.
THB 125, 122, and 118 million answer different questions. Recognized revenue, invoices issued, and cash received should reconcile under each job's terms. No bad debts, returns, or other intervening items are assumed here.
Company-wide DSO on credit billings rises from 52.14 to 56.84 days, using average receivables and 365 days. Average contract assets relative to revenue are 18.25 and 21.90 days, respectively. The latter is displayed separately for work that is not yet a receivable. Do not add them into one standard cycle. They use different revenue bases, and the work's path still needs checking.
Accounting should separate receivables by enforceable billing documents, invoices, due dates, and disputes. Project managers should separate work awaiting acceptance, paperwork, or a contractual billing milestone. Calling all of this “waiting for cash” sends the job to the wrong team.
Use CCC only where the figures match
This business has equipment and services. Do not directly measure equipment inventory days using THB 77 million in total cost of sales. Part 3 isolates THB 75 million equipment credit sales, THB 48 million equipment cost of sales, and THB 51 million equipment credit purchases in Y2.
Within that scope, the equipment cash conversion cycle (CCC) rises from 64.31 to 76.71 days. Equipment collection and inventory days grow, partly offset by longer payables days. Check item ages and supplier terms before assuming every inventory item must be cut or every supplier paid later.
Installation and support work need separate billing terms and labor-cost analysis. The equipment CCC is not the number of days the whole company runs out of cash. Payroll, tax, advances, investment, and debt have their own timing.
Find what supported higher year-end cash
| Item | Y1 | Y2 |
|---|---|---|
| Opening cash | 5.0 | 4.0 |
| CFO | +12.4 | +11.4 |
| Fixed-asset purchases | −7.0 | −9.0 |
| Net increase in borrowing | +3.0 | +4.0 |
| Dividends paid | −9.4 | −4.4 |
| Closing cash | 4.0 | 6.0 |
Y2 cash rises THB 2 million even while CFO falls because net borrowing rises and dividends are lower than in the prior year. Fixed-asset investment also rises. CFO after investment leaves THB 2.4 million, versus THB 5.4 million in Y1.
Whether to cut investment or dividends depends on agreed obligations and business effects, not the table alone. Before taking more work, identify which credit facility funds its up-front costs and which receipts will cover debt as it falls due.
A THB 4 million net rise in borrowing does not show gross draws or principal repayments, so DSCR cannot yet be calculated. The THB 8 million current debt balance at the end of Y2 needs a maturity schedule; it is not principal already repaid during the year.
Choose the first task from evidence and ownership
Here the questions range from a lower installation margin to higher receivables and contract assets. But “reduce receivables” is not yet a task someone can perform. Name the item, condition, and owner.
| Observation | Data requested | Owner's task |
|---|---|---|
| Gross margin falls | Revenue, labor cost, subcontractors, and extra work by project | Project manager and cost accounting check completeness and scope creep |
| Receivables grow faster than revenue | Receivables aging, due dates, billing acknowledgments, and disputes | Collections team separates due items from those not yet due |
| Contract assets rise | Recognized work and conditions still to meet before billing | Project manager and sales confirm acceptance steps with the customer |
| Equipment inventory rises | Inventory age, supporting orders, and delivery schedules | Warehouse and purchasing separate goods prepared for dispatch from slow or questionable stock |
| Less cash remains after investment | Cash plan, investment payment dates, dividends, and debt schedule | Finance offers time-based options for management to decide |
Then prioritize by near-term cash need, delivery risk, and evidence available. Picking only the worst-looking ratio can send the team toward a less urgent issue.
Design data so statements trace back to work
For hypothetical software, SI, or Odoo Partner teams, link project numbers to scope, actual hours, subcontractor cost, acceptance evidence, invoices, and receipts. When margin or receivables change, the team can trace the affected projects.
With Odoo, define how Sales, Project, Purchase, and Accounting documents connect in actual work, then test reconciliation back to the accounts. Some acceptance states or contractual billing rights may need extra design. Having the modules installed does not establish that the data links are correct.
A factory needs to trace raw materials, work in progress, finished goods, and scrap to production orders and related costs. Align codes and periods before comparing turnover.
This is a data-design proposal, not the outcome of any customer installation. Next-cycle metrics should reflect things the team can change, such as acceptance-pending work by cause, overdue invoices, and inventory with no confirmed use plan.
Make the next financial review answer a testable question
At the next financial review, I would choose one material set of outstanding balances, identify whether it sits in receivables, contract assets, or inventory, name who must do what, and bring the evidence back next time. Place its effect on the cash plan beside it.
Once items and owners are named, set the desired outcome under the work's actual terms: complete acceptance before the agreed billing date, for example, or confirm a use plan for stock held. Compare actual receipts and payments with the forecast and record why they differed. The next review can then assess what the team's actions changed.
Source framework and scope of the example
All figures are original hypothetical examples reconciled across income statement, balance sheet, and cash flow. The profit-to-CFO bridge uses noncash and accrual adjustments. For the cash-flow principles, see IFRS Foundation: IAS 7 Statement of Cash Flows The case's CFO classification of interest and tax is expressly assumed. The work-tracking and data-design steps are proposals for application.
