The continuous movement of cash into and out of a business during a business year.
Cash is the most liquid asset of a business (money bills, bank deposits)
- all the Cash Flows summed up are the change in position of “Cash” in the Balance Sheet
different positions
- operations (normal business activities, production, sales)
- hopefully positive
- investments (new buildings, factories, etc)
- usually negative
- only positive if de-investing, e.g. selling a factory
- financing (loans, external financing resources)
- usually positive
- only negative if no new external capital is entering the business, e.g. only repaying loans
continuous (more than 1 year) negative cash flow is a telltale sign of a struggling business.
Causes of Cash Flow Problems
- overtrading
- too fast growth or investments
- investing too much in fixed assets
- stockpiling
- money tied up in stock is not productive
- allowing too much credit
- to your own customers
- taking too much credit and overborrowing
- loans, external investments, paying dividends, etc
- unexpected changes in demand and in costs
Improving Cash Flow
- overdraft facilities (credit cards)
- usually highest cost per capital
- combination of short- and long-term loans
- reduce stocks (inventory)
- use a factoring company
- sell unused assets
- sell and leaseback
- stimulate sales for cash (e.g. discounts)
- delay own payments
Operating Cash Flow (Indirect Method)
- start from operating profit from Profit and Loss Statement
- minus non-cash income
- amortization, depreciation, etc
- plus non-cash expenses
- changes in inventory, etc
- = cash flow from operations
or another variant of writing it down
- start with EBT
-
- write-up
-
- deprecation, amortization, impairment → Non-Cash Transactions
-
- +/- inventory receivables, deferred assets
- -/+ payables (except for inventory), provisions, deferred liabilities (not loans, bonds)
- = operations cash flow
Included/Excluded?
- EBT (operating profit) already includes interest earnings and dividend earnings
Startup Cash Flow scheme
- future investments need to be subtracted from company values
- therefore profit is not worth anything
- goal: invest more and more until operations carry the investments themselves or investments can be lowered without reducing operation profit