Cash flow is an important key figure in a company and literally translated means cash = money, flow = flow. It shows the cash flow within a defined period and provides information about the liquidity and earnings of a company. It is considered good when the payments into a company are greater than the expenses of the company.
Definition of cash flow
The cash flow is the balance of incoming and outgoing payments in a specified accounting period. When calculating the cash flow for companies, income and expenses that do not become cash in this period are not taken into account. Such income and expenses can be write-offs and additions as well as the release of provisions .
- Operating cash flow
- Cash flow from investing activities
- Cash flow from financing activities
differentiated. Based on these three areas, the change in the level of financial resources within the defined accounting period can be identified.
Operating cash flow
The operating cash flow is the result of all historical events with an impact on cash flows in the course of normal business activities. It is used as a measuring instrument for the internal financing potential of a company in the analysis of the annual financial statements. If it is positive, the company can use its sales to repay loans or make new investments. While operational measures the surplus of payments from production and sales activities within a period, the entire cash flow also includes payments made and paid out, which are triggered by investment and distribution decisions as well as financing decisions.
Cash flow from investing activities
The cash flow from investing activities shows the incoming and outgoing payments of a company caused by investments . The difference between the payment and payment indicates whether the investment activities carried out in the financial year resulted in positive or negative returns in the company.
Cash flow from financing activities
The cash flow from financing activities includes all cash flows that relate to changes in equity in a company. Examples are the capital increase through share issues but also the payment of profit shares or dividends.
The cash flow as the basis for the company analysis
The cash flow is an important basis for company and balance sheet analysis . In the financial company analysis, it provides information on whether a company is able to make investments on its own and remain competitive in the future. It provides information on the amount of funds for debt repayment, expenses, interest payments and the payment of dividends to the shareholders as well as whether there is a risk of insolvency due to a persistently negative cash flow. It is a profit indicator in the business analysis of the economy. The gross cash flow is that generated by a company.
The CF can be used for the formation of reserves and for the repayment of debts, therefore further parameters must be determined to determine the available financial resources for investments and dividend payments. The net cash flow is determined by subtracting expenditure-relevant expenses, for example private withdrawals, from the gross cash flow after the balance sheet has been drawn up.
Cash flow planning for companies
The aim of permanent cash flow planning is the earliest possible knowledge about the short, medium and long-term financial situation of the company. Both own liquidity and all outside capital are included. The lessons learned from this planning include
- the possible restriction of future private withdrawals
- a decrease in cash flow due to a decrease in overall financial strength
- the possibility of extraordinary debt repayment
- an assessment of the future level of indebtedness in general
- and more
It is always a matter of assessing how the company’s financial situation will or can develop based on the most recent figures and evaluations possible.
Calculation of the cash flow according to two approaches
The cash flow is the netted result between income and expenditure for a defined period. This balance is an assessment criterion for the financial corporate structure, both for liquidity and for internal financing. A distinction is made between two types of calculation, the bottom line being that both lead to the same result. The prerequisite for this is that the same criteria for determination and delimitation are used in both cases.
Indirect cash flow
When calculating the indirect cash flow, all non-cash items must be deducted from the annual net income.
| position | Examples | |
| Annual surplus | ||
| + | Non-cash expenses | Depreciation, increase in reserves and provisions, reduction in the inventory of finished and unfinished goods, extraordinary expenses |
| – | Non-cash income | Write-ups, release of provisions, withdrawals from reserves, increase in stocks of finished and unfinished goods, extraordinary income |
| = | Cash flow (ie p.) |
According to howsmb.com, the basis of calculation is the company’s balance sheet success based on the annual surplus after taxes. All expenses-neutral expenses are added; i.e. those as offsetting items on the balance sheet without any impact on liquidity and payment. One example of this is the depreciation as depreciation for expenses, another the formation or increase of provisions. Such income-neutral income such as write-ups are deducted as an increase in the book value. For the balance sheet analysis , the indirect CF is the decisive basis for determination and evaluation.
