Cash flow is a measure of the net inflow of cash over a given period (usually one year or one month). If the cash flow is positive, economists speak of a cash inflow or a cash inflow. In the reverse case, there is talk of a cash outflow or a negative cash flow. The cash flow is not to be confused with the company profit and is to be delimited from this in the following.
The profit of a company indicates how much money is finally distributed to the shareholders or the owner of the company. The cash flow, on the other hand, shows the total amount of money generated. The higher the cash flow, the greater the opportunities for financing new acquisitions. For new machines or other means of production then no credit is needed. If the cash flow is negative, the company had to put funds into the business in the period under review. However, the money is not to be considered as lost, rather it can appear in the form of inventories or receivables in the balance sheets.
Formula for calculation
A formula with which you can calculate the cash flow can be found on the website controllingportal.de. It is subdivided into the indirect method of calculation and the direct method. Here we briefly present the indirect cash flow determination and refer to controllingportal.de for more in-depth information.
– non-cash income
+ non-cash expenses
= Cash flow
An exemplary calculation of the cash flow should clarify the definition of the term:
- Sales: 200,000 euros
- Salaries: 150,000 euros
- Depreciation: 15,000 euros
- Formation of guarantee provisions: 10,000 euros
The profit is calculated as turnover minus the costs. In this example, it is 25,000 euros. Cash flow, on the other hand, includes write-downs and guarantee provisions, as they remain de facto in the company. If you want to calculate the cash flow in this example, it is therefore 50,000 euros, well above the profit.
However, the assessment of cash flow does not necessarily have to be limited to one company. As is the case with households, banks also assess cash flow before granting a loan, for example for mortgage lending.