How is our cash flow created

What does cash flow mean and why is it important to your company?

What is cash flow?

The word cash flow comes from English and means flow of money or capital flow. The cash flow is a balance sheet figure for companies that indicates how much capital has flowed in or out in a certain period. This means that the cash flow can be used to compare incoming and outgoing payments over a certain period of time (usually a year) and thus the liquid assets of a company can be calculated. If the cash flow in a financial year is positive, there is an annual surplus, if it is negative, there is an annual deficit.

Why is cash flow so important?

In times of globalization and networking, uniform, meaningful indicators such as cash flow are required to assess companies. For example, it is used by investors to analyze the company's situation and indicates how much money is available to the company for investment activities, debt repayment and profit distribution. He also provides information on whether the company is threatened with bankruptcy. It is a practical metric that shows how healthy a company is in terms of its financial position - especially since cash flow is not as easy to manipulate as the annual financial statements.

How can you divide the cash flow?

The total cash flow results from three elements: the operating cash flow, the cash flow from investments and the cash flow from financing activities. The operating cash flow relates to the normal business activities of the company and is generated through the value chain. So only income and expenses from normal business activity are included, for example production costs. The cash flow from investments relates to the income and expenditure of physical investments (e.g. production facilities) and monetary assets. The cash flow from financing activities relates to a company's equity. For example, equity can be increased by issuing shares or equity can be reduced by distributing dividends to shareholders.

How do you calculate the cash flow?

There are two ways to calculate cash flow, the direct method and the indirect method. According to the direct method, expenses (cash expenses such as salary payments, taxes, material costs, etc.) are deducted from the income (cash income such as sales, interest income, etc.), so the result is:

Direct cash flow =

revenue

- Expenditure

The indirect method results from adjusting the profit. In doing so, non-cash expenses such as depreciation and provisions are added:

Indirect cash flow =

Profit

+ Depreciation

+ Provisions

Calculation of the cash flow according to DVFA / SG

The German Association for Financial Analysis and Investment Consulting (DVFA) and the Schmalenbach-Gesellschaft / Deutsche Gesellschaft für Betriebswirtschaft (SG) recommend a formula for calculating the cash flow that is based on the indirect method. Depreciation / write-ups, differences in long-term provisions and other expenses and income are added to (or subtracted) from profit after tax. So it results:

Cash flow according to DVFA / SG =

Profit after tax for the period

+/- write-downs / write-ups

+/- differences in long-term provisions

+/- other expenses and income

What is the free cash flow?

The free cash flow, i.e. the free cash flow, is only calculated from the operating cash flow and investment activity:

Free cash flow =

Operating cash flow

- investment

+ Divestment

The free cash flow is that part of the cash flow that is freely available. It shows how much money is available for paying dividends and paying off debts.

Importance of positive and negative cash flow

If the cash flow is positive, then the income predominates and the company has generated a surplus. If the cash flow is negative, then the company had more expenses than income in the period under consideration, which results in a deficit.

What do you need the cash flow for?

In times of globalization and networking, uniform, meaningful indicators such as cash flow are required to assess companies. For example, it is used by investors to analyze the company's situation and indicates how much money is available to the company for investment activities, debt repayment and profit distribution. He also provides information on whether the company is threatened with bankruptcy. It is a practical metric that shows how healthy a company is in terms of its financial position - especially since cash flow is not as easy to manipulate as the annual financial statements.

How can you divide the cash flow?

The total cash flow results from three elements: the operating cash flow, the cash flow from investments and the cash flow from financing activities. The operating cash flow relates to the normal business activities of the company and is created through the value chain. So only income and expenses from normal business activity are included, for example production costs. The cash flow from investments relates to the income and expenditure of physical investments (e.g. production facilities) and monetary assets. The cash flow from financing activities relates to a company's equity. For example, equity can be increased by issuing shares or equity can be reduced by distributing dividends to shareholders.

How do you calculate the cash flow?

There are two ways to calculate cash flow, the direct method and the indirect method. According to the direct method, expenses (cash expenses such as salary payments, taxes, material costs, etc.) are deducted from the income (cash income such as sales, interest income, etc.), so the result is:

Direct cash flow =

revenue

- Expenditure

The indirect method results from adjusting the profit. In doing so, non-cash expenses such as depreciation and provisions are added:

Indirect cash flow =

Profit

+ Depreciation

+ Provisions

Calculation of the cash flow according to DVFA / SG

The German Association for Financial Analysis and Investment Consulting (DVFA) and the Schmalenbach-Gesellschaft / Deutsche Gesellschaft für Betriebswirtschaft (SG) recommend a formula for calculating the cash flow that is based on the indirect method. Depreciation / write-ups, differences in long-term provisions and other expenses and income are added to (or subtracted) from profit after tax. So it results:

Cash flow according to DVFA / SG =

Profit for the period after taxes

+/- write-downs / write-ups

+/- differences in long-term provisions

+/- other expenses and income

What is the free cash flow?

The free cash flow, i.e. the free cash flow, is only calculated from the operating cash flow and investment activity:

Free cash flow =

Operating cash flow

- investment

+ Divestment

The free cash flow is that part of the cash flow that is freely available. It indicates how much money is available for paying dividends and paying off debts.

Importance of positive and negative cash flow

If the cash flow is positive, then the income predominates and the company has generated a surplus. If the cash flow is negative, then the company had more expenses than income in the period under review, which results in a deficit.