Calculating cash flow: formulas, methods and why it is important for companies

What is cash flow simply explained?

cash flow is a term that is often used as a measure of the financial health of a company. But what exactly is behind it? Cash flow, also known as cash flow, cash flow or cash flow, provides insight into Cash inflow or outflow of a company over a specific period of time — whether monthly, quarterly, or annually. This key figure is crucial because it shows how well your company is managing its financial resources, regardless of non-cash transactions such as depreciation.

Simply put, cash flow shows how much money is actually available to your company after all ongoing costs and liabilities have been covered. This makes it possible to assess the liquidity and financial strength of your company — key factors for sustainable business development.

Why is it so important to calculate cash flow?

Calculating cash flow is a crucial basis for effective and precise financial planning. As standardized and meaningful financial key figure Cash flow creates transparency and reduces the risk of financial manipulation. This transparency enables investors and other stakeholders to have a clear insight into Liquidity situation of a company to receive.

The cash flow calculation shows exactly how much money is actually available for investments, debt repayments or dividends. A deep understanding of cash flow helps Identify and mitigate financial risks at an early stage. This allows companies to act proactively before serious financial problems such as insolvency or insolvency occur.

Cash flow and liquidity — what's the difference?

Cash flow and liquidity are closely linked, but they don't mean the same thing. Cash flow is a Stream size and shows how much money flows into or out of the company over a certain period of time (for example from operating business, investments or financing). Meanwhile, liquidity describes the solvency, i.e. the company's ability to meet its payment obligations at a specific point in time.

Both are crucial for assessing financial stability: A positive cash flow ensures that the company can operate effectively and grow over the long term, while good liquidity ensures that short-term payment obligations can be met — even in the event of unexpected expenses or fluctuations in income. A company can be liquid without having a positive cash flow, and vice versa.

Types of cash flow and their significance for companies

A company's cash flow is divided into different categories, each of which highlights different aspects of a company's financial activities. They can be considered separately, but together they best represent a company's liquidity situation.

1. Operating cash flow (OCF)

The operating cash flow shows the result of all regular cash inflows and outflows as part of a company's operating performance for a specific period. This includes income from sales of products or services, minus operating expenses such as salaries, rents, and taxes.

A positive operating cash flow shows that a company is generating enough funds to cover its current expenses — a sign of operational efficiency.

Alternatively, operating cash flow can also be referred to as gross cash flow. If you subtract the taxes actually paid, you get the net cash flow.

2. Investment cash flow (ICF)

The investment cash flow provides information about the cash flows that from investment activities This results in the purchase or sale of fixed assets, equipment, and other long-term investments. Negative cash flow from investing activities is often observed during growth phases when companies invest in their future. Positive cash flow usually results from the sale of investments, which may indicate a period of consolidation or contraction.

3. Financing cash flow (FCF)

The cash flow from financing activities reflects the transactions carried out by Equity and debt structure affect the company. This includes income from the issuance of shares or bonds and expenses for dividend payments or the repayment of debts.

A positive cash flow from financing activities shows that the company is raising new capital, while a negative value indicates that the company is repaying capital to owners or repaying debts.

4. Free cash flow (FCF)

Free cash flow is the cash flow that is Deduction of all operating expenses and investments What's left over. It is an important indicator of a company's financial flexibility, as it shows how much money is available to pay dividends, reduce debt, or make further investments. Stable or growing free cash flow is often seen as a sign of healthy corporate governance.

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‍overview

Operating cash flow = cash flow from ongoing operations = shows the company's ability to generate liquidity from operating activities and measures the efficiency of the core business

Investment cash flow = cash flows from investments = provides information about investments in future growth and long-term assets

Financing cash flow= cash inflows and outflows from financing activities = reflects capital structure and financing policy

Free cash flow = cash flow after deducting all investments and current expenses = shows financial flexibility and opportunities for investments, distributions or debt reduction

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Calculation methods: This is how you can calculate cash flow

Cash flow can be calculated in two different ways — directly or indirectly. Which calculation is chosen depends on the available information on the one hand and on the goal of the calculation on the other hand.

1. The indirect cash flow calculation

The indirect method is derived from the annual financial statements and adjusted for non-cash expenses and non-cash income. It is used when a statement about the liquidity situation of a company can only be made on the basis of publicly available annual financial statements.

This is the case with external tax and business consultants, among others. This calculation does not provide the option of including up-to-date figures.

Calculation of indirect cash flow:

Cash flow from operating activities = net income + depreciation + changes in current assets and current liabilities

Explanation of the cash flow calculation formula:

• Increasing receivables and increasing inventories mean cash outflows (are deducted).
• Increasing liabilities mean cash inflows (are added).

example:

A company has a net income of 150,000 euros, depreciation of 50,000 euros and an increase in receivables of 20,000 euros. The latter means that the company has loaned more money to customers, which represents an outflow of means of payment.

The calculation of operating cash flow is therefore as follows: 150,000 euros + 50,000 euros − 20,000 euros = 180,000.

2. Direct cash flow calculation

The direct cash flow calculation Gives a statement about the timely cash flow of a company, as it is not based on retrospective figures in the annual financial statements, but on incoming and outgoing payments on a daily basis. In addition, direct calculation makes it possible to list cash flows more precisely. However, you should pay particular attention to the accuracy of the internal information when calculating, as this is used for the calculation without additional, prior verification.

To the inputs Count:

• Proceeds from product sales
• Payments from settlement of claims
• Borrowing

To the outputs Count:

• Payouts for wages/salaries
• Settlement of outstanding supplier invoices
• Loan repayments

Calculate direct operating cash flow:

Cash flow from operating activities = payments from sales − payments to suppliers and employees

example:

Over the course of a year, a company receives 500,000 euros from product sales and pays 300,000 euros for raw materials, salaries and other operating costs. The operating cash flow would then be: 500,000 euros − 300,000 euros = 200,000 euros.

Calculating cash flow: Key figures for cash flow valuation

After you've calculated the cash flow, various metrics help you to more accurately assess the financial health of your company. These key figures are relevant to better interpret the generated cash flow and to understand its impact on company performance.

Methods such as Discounted cash flow (DCF) apply or even the Cash flow profitability , provides valuable insights into the effectiveness of capital use and the long-term value of the company. The DCF analyses estimates of a company's future cash flows and discounts them to their current value. These key figures make it possible to give both investors and internal decision makers a clear perspective on the financial stability and future viability of the company.

Example: Investing in a new production plant

You run a medium-sized company that manufactures household appliances and would like to Plan investments, for example in a new production plant.

Investment details:

• Costs: 5 million euros
• Lifespan: 10 years
• Expected benefits: Additional income of 1.5 million euros per year and operating cost savings of 300,000 euros per year.

Estimation of cash flows:

• Annual free cash flow (FCF): 1.8 million euros (1.5 million euros additional income + 300,000 euros savings)

Calculate discounted cash flow:

• discount rate: 8%

To calculate the free cash flow for each year, the annual free cash flow is discounted at the discount rate of 8 percent. The formula for discounted cash flow in a given year is: dcf_T = Free cash flow: (1+0.08) ^t

For the entire investment, add up the discounted cash flows over the 10 years.

Investment decision:

If the sum of discounted cash flows over 10 years exceeds the investment costs of 5 million euros, the investment is worthwhile. In this case, the sum of discounted cash flows is around 12 million euros. The investment is therefore financially attractive.

Important information:

OCF, ICF, and FCF are direct measurements of the various types of cash flows that a company generates or uses, depending on its operational, investment, and financial activities. The DCF, on the other hand, is an analysis or valuation method that uses these cash flows to determine the present value or fair value of a company.

Example: Investing in a new warehouse and logistics center

As a company in ecommerce Are you planning to invest in a new warehouse and logistics center to shorten delivery times and increase storage capacity.

DCF application:

Future savings through more efficient warehouse processes and increased sales due to shorter delivery times are discounted to assess the profitability of the warehouse.

Expected cash flows:

Savings on shipping costs, increased turnover due to higher customer satisfaction and lower returns. By discounting these cash flows to the current point in time, you can assess whether the investment is worthwhile in the long term.

Example: Investing in automation software

Yours marketing agency plans to invest in automation software for project management and reporting to speed up work processes and improve customer results.

DCF application:

The agency estimates future savings in working time and costs as well as a possible increase in turnover through improved services and subscribes to cash flows.

Expected cash flows:

Savings due to less time spent per project, potential new customers through better performance transparency, improved customer loyalty. The DCF analysis shows whether the investment in the software is profitable through long-term efficiency improvements.

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Positive vs. negative cash flow

As mentioned earlier, cash flow can be both positive and negative. Below, we'll look at both options:

Positive cash flow — opportunities and benefits

A positive cash flow shows that a company achieved surplusesbecause inflows exceed outflows in the period under consideration. This is a sign of financial health and allows the company to cover operating costs, repay debts, invest, and build reserves. Strong cash flow also increases company value, which attracts investors and lenders.

Positive cash flow despite losses

Despite positive cash flows, a company can report losses in the income statement because non-cash items such as depreciation reduce accounting profit without causing actual cash outflows. The company therefore remains liquid even if it makes losses.

Negative cash flow — risks and disadvantages

Negative cash flow means that More money flows out than flows in. In the short term, this may be normal during large investments, but in the long term, it is indicative of serious financial problems. This can lead to dependence on external financing and limits growth plans. Permanently negative cash flow, also known as cash loss or cash drain, increases the risk of insolvency.

Cash flow analysis: assessment of liquidity and stability

A comprehensive cash flow analysis is important to assess the liquidity and financial stability of your company. This process allows you to to track the effectiveness of money flows and understand how well your company is able to meet its short and long-term financial obligations.

Calculate cash flows with Excel

As long as your requirements are relatively simple and you only have limited amounts of data to process, the cash flow calculation is excel a good alternative. It is ideal for smaller companies with less complex financial structures, or for those who need a cost-effective solution to manage their basic financial data.

Calculate cash flows with software

As your business grows and financial data becomes more complex, you'll find that Excel is no longer enough. Here, a specialized Cash flow management software such as Tidely, decisive advantages. It automates many of the processes that you need to manually perform in Excel and offers advanced analysis tools that are designed to give you a clear picture of your company's financial health.

Conclusion: Calculating, planning and optimizing cash flow made easy

A cash flow plan helps you react to your company's financial situation at an early stage. With tools such as Tidely Can you optimize your cash flow by Plan scenarios and regular cash flow forecasts uses to prevent liquidity bottlenecks at an early stage.

With Tidely, you always have your cash flow under control: The automated and up-to-date presentation ensures that you always know where your company stands financially. Our cash flow forecasts not only help you with short-term cash management, but are also a crucial part of strategic planning — whether for the next few months or the next five years.

Cash flow planning with scenario analyses

Scenario analyses are a central component of cash flow optimization with Tidely. They give you the opportunity to play through various developments — from best case to worst case. This way, you know how different decisions, such as investments in new machinery or external events such as market fluctuations, affect your financial situation. The sensitivity analysis makes it easy for you to quickly assess the effect of each measure and make well-founded decisions.

Preventing liquidity bottlenecks

With Tidely, you have the opportunity to create your Liquidity planning Quick and easy to tackle and identify financial risks at an early stage. Automated cash flow forecasts and clearly visualized scenarios help you identify potential bottlenecks before they become a problem — so you remain able to act at any time.

Thanks Tidely Optimize your cash flow and remain able to act even when things get difficult — manage your finances securely and proactively so that your company continues to grow strongly tomorrow.

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FAQ

How is cash flow calculated?

Cash flow is calculated using either the direct or indirect method. The direct method takes into account actual deposits and withdrawals, while the indirect method is based on the financial statements.

What is cash flow simply explained?

Cash flow measures cash flow within a specific period of time. In contrast, liquidity describes a company's ability to meet its liabilities.

What is the cash flow in the balance sheet?

Cash flow is not shown directly on the balance sheet, but is derived from the income statement and other financial reports. It shows the change in the company's cash equivalents and provides information on how they flow over a specific period of time.

Is cash flow before or after taxes?

Cash flow can be calculated both before and after taxes. Operating cash flow usually takes into account the tax burden, as this represents a real expense for the company and influences actual liquidity.

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