If a company finds itself in difficult economic waters, the first and foremost task of management is to keep an eye on the cash flow.
What exactly is „cash flow“?
„Cash Flow“ – also „Kassenzufluss“ in German – is the amount that denotes the difference between the cash inflows and outflows of a period. However, only actual cash movements count, not calculated ones. Therefore, for example, an invoice is only recognised in "Cash Flow" once it has been paid.
„Geldfluss“ as code number
A „cash flow“ is primarily a key figure for the money flow within a company. A positive „cash flow“ means that more money is flowing into the company than out. This keeps the company „solvent“, i.e. the opposite of insolvent. This „solvency“, also known as liquidity, does not only refer to the financing of day-to-day operations, but can also be included for other investments. A good basis for negotiations with banks or investors.
Less good: „Cash Loss“
The basis for this is less favourable if the company has a „negative cash flow“. In this case, one speaks of a „cash loss“. This can happen quickly, among other things, if, for example, a project is invoiced in September, but payment is not received until October. Then it can happen that the balance the cash flow slides into negative territory in September. However, these are cases that do not significantly affect the business and can often be avoided. However, if the company has a general tendency towards „cash loss“, which is increasing rather than decreasing, then it will not be long before the company becomes insolvent.
How is „cash flow“ calculated?
One is the indirect calculation. In this case, every income and every expense from the Net income for the year calculated, where no money flows. This can include, for example, withdrawals from reserves or activated own services. However, the reversal of value adjustments or increases in inventories of manufactured goods are also recognised as „non-cash“ revenues within the company. Applications in this case include, for example, depreciation or reductions in inventories of manufactured goods.
The other method is direct calculation. This involves deducting cash-effective but operationally necessary expenses from cash-effective but operationally necessary income. Cash-effective here means that the money is „in flow“. In the case of income, this could be sales revenue, capital contributions, or loan proceeds, for example. Expenses here refer to wages paid, other payments or investments, as well as loan repayments. Although the direct method is simpler, it is less frequently used because the relevant data, for example, for banks, is often unavailable.
In addition to these variations, „cash flow“ can also be calculated for individual areas of the company, such as „operating cash flow“, which shows movements from financing and investing activities.
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