[MUSIC] The only reason to invest in operating assets is to generate positive cash flows in the long run. Consistent generation of more cash than is being used enhances shareholder's value, why? When a company is funded as we saw with the example of a fisherman, it makes two types of investment. First, it requires equipment, the fishing boat, second, it builds up working capital. Financing its cash conversion cycle to finance these investments, a fisherman could raise equity and debt financing. Either cash flow generated from fishing is enough to meet interest and repay debt and to pay dividends for the mate who put money in the venture. The fishing company with the gradual will be able to buy more and more fishing boats and as it repays its debt it will be able own more. Note that contrary to the increasing popular consular wisdom, companies do repay their loans. They can raise money when they repay their debts contrary to many sovereign countries. Conversely, if the cash flow from fishing does a loop in of debts not to mention paying dividends. And if the company systematically needs to go to finance investments, it may not survive the next bad weather. When you don't manage cash flow in your business, the lights go out for you this is why the cash flow statement is more important financial statement used by investors. Cash flows can be classified into operating cash flow, investment cash flow, financing cash flow. We start with the mother of all cash flow, operating cash flows. The cash flow statement converse the actual based income statement number into a cash based profit number. The income statement fix the cash flow statement. But it is not a measure of cash flow because the timing of revenue collection and of expense payments is different from revenue and cost. Net income might never be converted to cash. They are charges that from sales, to measure net income, that are not going to be paid. Depreciation is such a charge but it will not be paid, nobody ever wanted for depreciation. Depreciation is a way to spread capital expenditure over the entire life of an asset but cash will be paid only in the period in which is purchased. Operating receipts are equal to sales only if sales are immediately paid in cash. Operating receipts differed from sales from the same period when customers are granted a prelevement period. Operating receipts are equal to sales for the period minus increase in trade receivables, or plus increase in trade receivables. Operating receipts equal net sales minutes change in trade receivables. Operating payments differed from operating costs not only because of payment terms but also because of differed charges which are picked up In the change in inventories. Bear with me a minute or two. Most of the purchases of all materials made during the period have been sold, and they constitute cost of goods sold. But some of the purchases are still in inventories. Therefore, to measure purchase, you have to add the increase in inventories to cost of good source or deduct the decrease in inventories. But to measure operating payments, you have also to deduct in account payables or to add the decrease in account payable. You may have noticed that the difference between operating revenues and receipts on the one hand and operating charges. And payments on the other are tiny difference derived from changes in inventories, receivables, payables that is to say from changes in working capital requirement. The difference from the position amortization and payment doesn't exist from the level of EBITDA. We can show that operating cash flow equals EBITDA minus increase in WCR. Operating cash flow equals EBITDA minus increase in WCR, other movements in cash derived from investment and financing. Investment cash flows include capital expenditures, acquisition of fixed asset, tangible and intangible minus disposal of fixed asset at the price they are sold. The result is shown as a financing requirement or a surplus, in rare cases. Cash flow from investing activities equals investing activities minus disposal of fixed assets. An important metric is the free cash flow, which is defined as the difference between After tax Operating cash flow and Cash Flow from investing activities. In the early phases of the life of your venture, free cash flows will be negative. Additional financial resources will have to raised to cover your vantage cash flow requirements. In the next chapter, we will address financing. Good luck, and goodbye. [MUSIC]