Profit and cash flow describe different things. A sale can be recorded before the customer pays. Equipment can be paid for now and expensed through depreciation over several years. Both timing differences matter.
A fictional business bridge
Suppose operating profit after tax is £20m. Add back £3m of non-cash depreciation, subtract £5m of capital expenditure and subtract £4m invested in working capital. The illustrative unlevered free cash flow is £14m.
That £4m might reflect cash tied up in receivables and inventory, net of operating supplier credit. Growing revenue can require more of these assets. Faster growth is not automatically more cash today.
This simplified cash flow is before financing flows and intended for a business valuation. It is not the same as the cash balance, accounting profit or dividends available without further judgement.
Try explaining it
Everything else unchanged, capital expenditure rises from £5m to £8m. What happens to free cash flow?
Reveal the worked answer
It falls from £14m to £11m. The investment may support later growth, but it uses £3m more cash in this period.
Growth needs funding
Sales recorded before customers pay can increase receivables. Buying stock uses cash before a sale; supplier credit can partly offset that use. Compare the change in operating working capital, rather than subtracting its entire balance from every year’s cash flow.
Check your understanding
Receivables rise £8m, inventory rises £3m and trade payables rise £4m. How much cash is absorbed?
See the worked answer
£7m: £8m + £3m − £4m. This example excludes other working-capital accounts. A positive increase in operating working capital reduces free cash flow.
Your next step
In the valuation lab, raise the working-capital requirement while keeping growth and margins unchanged. Explain why a profitable business can become less valuable.
SEC: Beginners' Guide to Financial Statements. Reviewed 14 October 2026. Worked examples and exercises are original illustrations; no current market prices are used.