Lesson 01 — Cash from Operations (CFO)
Week 06 · Lesson 1 of 4 · Week 06 — Cash Flow Basics
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CFO = cash generated from the company's normal business operations. It starts with Net Profit and adjusts for: Noncash items (add back depreciation — no cash...
What is CFO?
CFO = cash generated from the company's normal business operations.
It starts with Net Profit and adjusts for:
- Non-cash items (add back depreciation — no cash left the company)
- Working capital changes (increase in receivables = cash tied up; increase in payables = cash saved)
CFO formula (simplified)
CFO = Net Profit
+ Depreciation & Amortisation
+ Other non-cash charges
+/- Changes in working capital
CFO vs Profit — why they differ
| Scenario | Profit says | Cash says |
|---|---|---|
| Sold goods on credit | Revenue booked, profit up | No cash received yet |
| Depreciated a machine | Expense booked, profit down | No cash spent (already paid earlier) |
| Built up inventory | No P&L impact | Cash spent on raw materials |
The golden rule
CFO should be higher than PAT over time. If profit is high but CFO is low, the company is earning "paper profits" — not real cash.
What to look for
- CFO/PAT ratio > 1 = good cash conversion
- CFO consistently negative = business burns cash (dangerous unless startup phase)
- CFO growing with revenue = healthy business dynamics
Key takeaway
CFO is the heartbeat of the business. Strong CFO means the company is actually collecting the profits it reports.