What is the cash flow

Cash Flow - What is Cash Flow?

The cash flow or also cash flow is a balance sheet figure with which the cash inflow or outflow of a company is determined in a certain accounting period.

In addition to the cash flow, calculate other important balance sheet figures as part of your balance sheet analysis.

Cash flow refers to the inflow or outflow of liquid funds achieved in the financial year from the company's normal activities. In contrast to profit, fictitious expenses such as depreciation and provisions - i.e. non-cash transactions - must not appear in the cash flow.

The cash flow thus reflects the honest earnings and financial strength of a company and indicates how much money a company has actually generated in a period.

Determination of the cash flow

The cash flow is usually determined from ongoing business activities. Two methods have been established for calculating the cash flow:

Direct method cash flow

With the direct method, the cash flow is determined by the difference between deposits and withdrawals.

Indirect cash flow

With the indirect method, the cash flow results from an adjustment of the annual surplus (profit): Non-cash expenses and provisions are added.

The indirect method is usually preferred, as all relevant data is already available from accounting in the profit and loss account (P&L) or the income surplus account (EÜR).

Calculation of the cash flow according to DVFA / SG

To determine the cash flow you have

  • the German Association for Financial Analysis and Investment Consulting (DVFA) and
  • the Schmalenbach Society / German Society for Business Administration (SG)

published a recommendation that specifies the indirect method.

Cash flow: meaning and meaning

Like the company's success (profit / loss), cash flow can be positive or negative.

Positive cash flow = excess

If the cash flow is positive, the income is higher than the expenditure: there is a surplus. The financial resources generated can be used, for example, to make investments or repay debts.

Negative cash flow = deficit

With a negative cash flow, no money was generated, i.e. the expenses outweigh the income: a deficit arises. A negative cash flow indicates a liquidity shortage.

Free cash flow

The free cash flow, i.e. the free flow of money, describes distributions and interest as well as the repayment of loans for the available liquid funds. It is determined from the difference in the cash flow that comes from operating activities and is also made up of the net payments for investments in property, plant and equipment.