What is the cash flow statement?

Definition and purpose

The cash flow statement is more than just a financial report. It provides a detailed overview of all cash inflows and outflows within a specific period. This helps determine your cash position.

Unlike the income statement, which focuses on accounting-based revenues and expenses, the cash flow statement highlights actual cash movements.

This focus on real cash flows shows how well a company can generate liquidity. Insights from the cash flow statement are crucial for financial planning and identifying potential shortfalls.

Key functions of the cash flow statement

The cash flow statement plays a vital role in financial analysis and cash flow planning. It serves several important functions, including:

Liquidity proof

• Documentation of solvency
• Evidence of cash inflows and outflows
• Basis for liquidity planning

Information function

• Transparency for stakeholders
• Basis for investment decisions
• Evaluation tool for lenders

Control function

• Monitoring financial flows
• Early detection of liquidity bottlenecks
• Efficiency control of working capital

Structure and components of the cash flow statement

The cash flow statement consists of three main sections: operating cash flow, investing cash flow, and financing cash flow. Each plays a crucial role in analyzing cash movements.

Cash flow statement: the 3 main sections

Operating cash flow

• Includes all cash flows from regular business operations
• Shows the company’s ability to generate liquidity from core activities
• Considered the most important indicator of sustainable business performance

Investing cash flow

• Represents investments
• Includes purchases and sales of fixed assets
• Reflects the company’s long-term growth strategy

Financing cash flow

• Documents capital movements with equity and debt investors
• Includes dividend payments and loan borrowings/repayments
• Reflects the company’s financing strategy

1. Operating cash flow: a closer look at core business

Operating cash flow examines inflows and outflows from day-to-day business operations.

Cash inflows from operations:

• Customer payments
• Interest received
• Other operating cash inflows

Cash outflows from operations:

• Payments to suppliers
• Payroll expenses
• Interest payments
• Tax payments

Example calculation: operating cash flow

Revenue: €1,000,000

+ Interest income: €20,000

– Supplier payment: €600,000

– Salaries: €250,000

– Interest payment: €30,000

– Taxes: €40,000

= Operating cash flow: €100,000

Factors influencing operating cash flow

Various factors impact operating cash flow, such as managing receivables, payables, and inventory. An optimized receivables management strategy – like shortening payment terms or implementing a just-in-time (JIT) system – can significantly improve liquidity.

Receivables

• Average days sales outstanding (DSO)
• Measures to shorten the cash conversion cycle
• Impact of different payment terms

Payables

• Optimization of payment terms
• Early payment discounts vs. extended payment terms
• Supplier financing options

Inventory

• Just-in-time vs. safety stock
• ABC analysis for inventory optimization
• Seasonal stockpiling

Example: optimizing working capital for operating cash flow

Initial situation of a mid-sized manufacturing company:

• Receivables: €2,000,000 (DSO: 60 days)
• Inventory: €1,500,000 (Turnover: 4x/year)
• Payables: €1,000,000 (DPO: 30 days)
• Tied-up working capital = €2,500,000

Optimization Measures

• Implementing factoring for 50% of receivables
• Introducing a JIT system
• Renegotiating supplier terms

Results After Optimization

• Receivables: €1,000,000 (DSO: 30 days)
• Inventory: €1,000,000 (Turnover: 6x/year)
• Payables: €1,500,000 (DPO: 45 days)
• Working capital = €500,000

→ Released operating cash flow: €2,000,000

2. Investing cash flow: securing the future

Investing cash flow tracks cash inflows and outflows related to investment activities. It provides insights into a company's long-term strategic direction.

Cash inflows from investing activities:

• Sale of fixed assets
• Divestment of equity stakes
• Sale of securities

Cash outflows from investing activities:

• Purchase of fixed assets
• Acquisition of equity stakes
• Investment in intangible assets

Example calculation: investing cash flow

Sell old machinery: €200,000

+ Sell shares: €150,000

– Purchase new machinery: €800,000

– Software subscription: €100,000

= Investing cash flow: – €550,000

3. Financing cash flow: capital structure and payouts

Financing cash flow shows how a company raises and uses capital – whether for growth or shareholder payouts. It reveals the company’s financing strategy and offers insight into stability and future plans.

Cash inflows from financing activities:

• Capital increases
• Loan borrowings
• Issuance of bonds

Cash outflows from financing activities:

• Dividend payments
• Loan repayments
• Share buybacks

A positive financing cash flow signals incoming capital for expansion or strategic investments. A negative figure can indicate debt reduction or shareholder distributions. The key is context: Is it sustainable growth or risky financing?

Business decisions and their impact on the cash flow statement

Theory is great, but how do specific business decisions impact the cash flow statement? Every company needs to make its money work. When investing, it’s crucial to know which decisions will pay off in the long run. Let’s look at two concrete examples – investing cash flow and operating cash flow.

Investment decision: impact on investing cash flow

A company spends €1 million on a new machine. The machine generates €250,000 in annual cash flow and retains a residual value of €100,000 after five years. Is the purchase worth it? The ROI provides the answer.

ROI calculation

ROI = (Cumulative Cash Flow – Investment) / Investment
= (€1,250,000 + €100,000 – €1,000,000) / €1,000,000
= 35%

Analysis and impact on the cash flow statement

A 35% ROI is solid. The investment pays off. The machine purchase immediately impacts investing cash flow as a significant outflow in the year of acquisition. In the following years, operating cash flow improves because the machine generates €250,000 annually. At the end of its lifespan, the €100,000 residual value flows back.

The large initial cash outflow is offset by stable yearly inflows and the final resale value. The investment temporarily burdens investing cash flow but strengthens operating cash flow in the long run.

Make-or-buy decision: impact on operating cash flow

One of the most strategic decisions a company faces: produce in-house or outsource? The answer lies in the numbers and affects operating cash flow.

In-house production

• Investment: €500,000
• Annual fixed costs: €100,000
• Variable cost per unit: €50

Outsourcing

• Price per unit: €80
• No fixed costs

The key question: Where is the break-even point?

Break-even calculation

Break-even quantity = Fixed Costs / (Outsourced Price – Variable Cost)
= €100,000 / (€80 – €50)
= 3,333 units

Analysis and impact on the cash flow statement

Producing more than 3,333 units makes in-house production more cost-effective. Below that, outsourcing is the smarter choice.

In-house production requires more upfront capital (reducing investing cash flow) but improves operating cash flow if production volume is high.

Outsourcing conserves liquidity but puts more strain on operating cash flow per unit produced.

Cash flow statement analysis: what should you pay attention to?

Not only the amount of cash flow matters but also its structure and stability. Three key questions help you analyze the cash flow statement:

• How stable is cash flow over time? Fluctuations can pose a risk.
• What percentage of total cash flow comes from operating cash flow? A high percentage indicates a solid business model.
• How sustainable are the earnings? One-time special effects can distort the picture.

In qualitative cash flow analysis, you differentiate between sustainability indicators and growth indicators.

Sustainability indicators

• Ratio of operating to total cash flow
• Stability of cash flows over time
• Quality of earnings

Growth indicators

• Investment ratio
• Self-financing ratio
• Payout ratio

These factors determine how well a company withstands crises and whether it can grow on its own. They are essential for analyzing the cash flow statement.

Identifying problems before they exist

Those who understand their cash flow statement can manage it – and avoid bottlenecks. Entrepreneurs should regularly compare actual cash flow with planned figures, check outstanding receivables and liabilities, and monitor inventory levels.

Regular cash flow monitoring and an early warning system are crucial. Metrics such as liquidity ratio or working capital ratio help identify potential financial bottlenecks early and take corrective action.

Establishing cash flow monitoring and an early warning system

Cash flow reveals whether a company is financially healthy. But it doesn’t run itself. Structured monitoring helps minimize liquidity risks:

Cash flow monitoring

• Plan vs. actual comparison: Does actual cash flow deviate from the liquidity planning?
• Receivables management: Have the most important customer payments been received?
• Check liabilities: Which invoices are about to become due?
• Analyze inventory: Is too much capital tied up in stock?

However, this analysis alone is not enough. You need an early warning system that monitors critical metrics:

Early warning system

• Liquidity ratio 1 (<0.2): Is immediately available cash sufficient to cover short-term liabilities?
• Working capital ratio (<1.2): Is current assets sufficient to meet short-term obligations?
• Operating cash flow / short-term liabilities (<0.3): Does ongoing business activity cover short-term debts?

How healthy is your company? Use benchmarks

In addition to individual analyses, benchmark values can help. You can review certain ratios for your cash flow statement analysis and use them as references:

• Operating cash flow / total cash flow >75% → Solid financial foundation
• Investment ratio >15% → Growth-oriented
• Self-financing ratio >100% → Financially independent from external lenders
• Payout ratio <50% → Sustainable financial strategy

Understanding the cash flow statement: the link with balance sheet and P&L

The full significance of a cash flow statement emerges only in conjunction with other financial reports:

• Cash flow statement + balance sheet: How do asset and capital structures change? How efficiently is working capital used?
• Cash flow statement + P&L: Are earnings sustainable? Which costs are non-cash? Where do timing differences between earnings and payments arise?

Integrated analysis: the key metrics

A deeper dive reveals critical interconnections:

• Cash conversion rate = Operating cash flow / EBIT → How much profit is actually converted into cash?
• Working capital efficiency = Working capital / revenue → How efficiently is tied-up capital used?
• Investment coverage = Operating cash flow / investments → Can investments be financed internally?

The cash flow statement at re:cap

re:cap provides businesses with cash flow software to manage and plan liquidity while offering financing when needed. A cash flow statement is part of this solution. You can access it in real-time, with live bank transaction processing, ensuring an up-to-date cash flow overview.

You can also create a cash flow statement at project and team levels by assigning transactions accordingly. This allows better cash data organization and deeper insights. It enables you to:

• Categorize your cash flow in more detail and generate a cash flow statement with only relevant transactions (e.g., IT salaries only).
• Customize transactions by team, business unit, or project to get tailored reports and understand liquidity at every level.
• Allocate expenses to different categories (COGS, operating expenses, financing costs, department, team, country, etc.).

The re:cap cash flow statement includes the following categories:

• Cash balance: the total cash balance at the beginning (BOP) and end of a period (EOP).
• Net cash flow: the total cash flow for the period, including optional breakdowns of inflows and outflows.
• Net operating cash flow: the total cash flow from all operating activities, showing how much cash the company generates from its products or services. Optional breakdowns into inflows, outflows, and detailed categories.
• Net cash flow from financing and investments: the total cash flow from all financing and investment activities, showing how cash is used for non-operating activities like debt or equity transactions. Optional breakdowns into inflows and outflows.
• Net intracompany cash flow: the total cash flow between company accounts or between subsidiaries' accounts. Optional breakdowns into inflows and outflows.

If you're looking for cash management software, we compare different providers like:

• Tidely alternatives
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Conclusion: the cash flow statement

A cash flow statement is more than a collection of numbers – it’s the key to your company’s financial health. It shows where your money comes from, where it goes, and whether your business is truly sustainably financed. Those who understand their cash flows make better decisions and secure liquidity in the long run.