The cash flow provides information on a company’s earnings and financial strength. Cash flow is particularly important for creditors and investors as well as shareholders of a company. Cash Flow Statement is dealt in IAS 7.
1) Definitions of Cash flow
Cash flow is the surplus of regular operating income over regular operating expenses. It thus provides the cash reserves that can be generated sustainably from the company’s operations in order to cover specific operating expenses.
The cash flow quantifies the surplus, which results when the expenditure is deducted from the income. It shows the extent to which a company has generated financial resources on its own. This figure shows how much the company can finance itself from the inside (internal financing), how great is the financial potential that grows out of its successful activity in the economy.
2) General information
It is clear from the definitions that the cash flow can be used to make a statement about the company’s earnings and financial strength, which is of great importance primarily to lenders, potential investors and shareholders. In order to make this statement, all items that do not have a monetary value must be removed from the net profit / loss for the year as they flow into or out of the amount without an actual monetary value being or has been spent. These include e.g. Depreciation and provisions. Two basic methods can be used for cash flow calculations:
3) Calculation of cash flow
A) Indirect cash flow determination
In order to determine the (gross) cash flow by indirect means, the items that are not cash effective are eliminated from the net profit for the year. The basic scheme for the indirect and more frequently used calculation of the cash flow is as follows:
– Non-cash income
+ Non-cash expenses
= Cash Flow (inflow/outflow)
Non-cash expenses include the following:
Settings in the reserves
Increase in profit
Increase in special reserves with reserve ratio
Increase in provisions
Inventory reduction of finished goods and work in progress
Periodic and extraordinary expenses
Non-cash income includes:
Withdrawal from reserves
Reduction of profits
Release of value adjustments
Reduction of special reserves with reserve ratio
Release of provisions
Increase in inventories of finished goods and work in progress
Non-periodic and extraordinary income
B) Direct cash flow determination
The (gross) cash flow is determined directly from the difference between all cash-generating income and the cash-effective expenses.
+ Cash income
– Cash expenses
= Cash Flow (inflow/outflow)
The cash income includes:
Proceeds from sales / receivables (cash flow, etc.)
Other deposits (cash flow, etc.)
Dis-investments (CF investment activity)
Equity capital (CF financing activity)
Borrowing (CF Financing Activities)
The payment expenses include the following:
Payments for personnel and liabilities (cash flow, etc.)
Disbursements for material and goods and liabilities (cash flow, etc.)
Other disbursements (cash flow, etc.)
Investment (CF investment activity)
Equity Acquisition (CF Financing Activities)
Crediting (CF Financing Activities)
The direct method is not used very frequently by companies, but it is a more accurate list of payment flows. In this case, the incoming surplus is calculated in the narrow sense.
4) Other cash flow calculation methods
A) Free cash flow
Operating cash flow plus cash flow from investing activities. Free cash flow funds enable companies to pay out dividends to shareholders or buy back shares.
B) Discounted cash flow method
It is an American variant of the income value method. The method is particularly suitable for a decision-oriented company assessment.
C) Cash flow return on investment
The cash flow return on investment makes it easier to assess the operating business and individual business areas. It represents a yield figure.