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For operating cash flow, sales and costs are taken account of inflation. For capital cash flow, working capital is taken account of inflation again -> incremental. But working capital normally is debtors less creditors. Will inflation be double counted?
Thank you.No it won’t.
Suppose receivables are 100 and payables are 30 – net 70.
If there is inflation at 10%, the receivables become 110 and payables become 33 – net 77.
The same as increasing 70 by 10% 🙂
Assuming no GST.
Suppose sales are 100 and costs are 30 – profit 70.
If there is inflation at 10%, the sales become 110 and costs become 33 – profit 77.
Profit increases 7 (or 10%) -> cash inflow
Working cap increases 7 (or 10%) -> cash outflow
So the net cash flow incremental is 0, isn’t it?
Working capital is receivables plus inventories less payables.
If sales are 100, it does not mean receivables are 100!!
To simply I assumed no inventory, eg shipping company.
But I understand now, previously I assumed all sales are converted to cash, however some are credit sales, so incremental of working capital just ‘reversed’ those part of sales because they are not converted to cash yet.
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