FIN.21:4.2 - Build the amount that can leave the business

Start with the selected operating and investment plan. FIN.4 supplies matching forecast flows and balances; FIN.9 supplies the comparison of competing capital uses. Include the cash required to maintain that plan, not only visibly discretionary new projects. Maintenance, working-capital growth and principal repayment can consume most of positive accounting earnings.

For an ordinary nonfinancial business, a qualified profit-to-cash bridge can begin with net income after interest and tax, add the relevant noncash charges, subtract capital expenditure and the increase in operating noncash working capital, and add net borrowing. The resulting flow to equity is useful only with matching definitions and all material adjustments. FIN.4 and FIN.7 develop the bridge and claim boundary. A supplied complete cash account is equally usable; do not force the indirect route when it adds no information.

Net borrowing must be obtainable under the selected financing policy. A formula that assumes replacement of every maturing loan does not establish that lenders will refinance it. Nor does a positive flow to equity establish the legal ability or wisdom to distribute it. Combine the flow with starting usable cash, desired protection and every affected date in FIN.2. Keep any proceeds restricted to investment out of an unrestricted payout pool.

Determine whether the apparent surplus is temporary, recurring or a liquidation of resources needed later. A seasonal receivable collection can be needed for the next inventory build. A divestment can produce a one-time release while reducing subsequent earnings. A cut in maintenance can create cash now by borrowing from future operating capacity. Those are different reasons for a high current balance and support different payout policies.