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 is the difference between cash inflows and outflows in a period. However, only real cash movements count, not calculated ones. This is why, for example, an invoice is only recognised in cash flow once it has been paid.
"Cash flow" as code number
A "cash flow" is primarily an indicator of the cash flow in a company. A positive cash flow means that more money flows into the company than flows out. This means that the company remains "solvent", i.e. the opposite of insolvent. This "solvency", or liquidity, not only relates to the financing of day-to-day operations, but can also be used 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, we speak of a "cash loss". This can happen quickly if, for example, a project is invoiced in September and payment is not received until October. This can result in the balance of money movements in September slips into negative territory. However, these are cases that do not significantly affect the business and can often even be avoided. However, if the company has a general tendency towards "cash loss", which increases rather than decreases, then it may not be long before the company goes bankrupt.
How do you calculate cash flow?
One is the indirect calculation. In this case, every income and every expense from the Net profit for the year calculated for which no money flows. These can be, for example, withdrawals from reserves or own work capitalised. However, the reversal of value adjustments or increases in inventories of products are also counted as "non-cash" income in the company. Applications in this case are, for example, depreciation and amortisation or reductions in inventories of products.
The other type is the direct calculation. In this method, expenses that are cash-effective but necessary for operations are deducted from income that is cash-effective but necessary for operations. Here, cash-effective means that the money is in "flow". In the case of income, this can be, for example, sales revenue, capital contributions or borrowings. Expenses here refer to wages paid, other payments or investments, as well as loan repayments. Although the direct variant is the simpler one, it is used less frequently as the relevant data is often not available to banks, for example.
In addition to these variants, the "cash flow" can also be calculated in individual areas of the company, such as the "operating cash flow", which shows the movements from financing and investing activities.
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