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 the "cash flow" ?
The "cash flow" - also cash inflow in German - is the amount that describes the difference between the cash inflows and outflows of a period. However, only real cash movements count, i.e. not calculated ones. This is why, for example, an invoice in the "cash flow" is only valid when it has been paid.
"Cash Flow" as code number
A "cash flow" is primarily an indicator of the flow of money in a company. A positive cash flow means that more money is flowing into the company than out. This means that the company remains "solvent", i.e. the opposite of insolvent. This "solvency", also 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 good if the company has a "negative cash flow". In this case, one speaks of a "cash loss". This can happen quickly if, for example, a project is invoiced in September and the payment is not received until October. Then it can happen that the balance of money movements slips into the negative in September. However, these are cases that do not significantly affect the business and can even often be avoided. However, if the company has a general tendency to "cash loss", which increases more than it decreases, then it may not be long before the company becomes insolvent.
How do you calculate the "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. But also the reversal of value adjustments or increases in stocks of products are calculated as "non-cash" income in the company. Applications in this case are e.g. depreciation or inventory reductions of products.
The other type is the direct calculation. In this case, the expenses that affect cash but are necessary for operations are deducted from the income that affects cash but is necessary for operations. Here, cash-effective means that the money is "flowing". In the case of income, this can be e.g. sales revenue, capital contributions or borrowing. 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 because the corresponding data are 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 investment activities.