Cash flow calculations form one of the three basic calculations of a company's financial management, in addition to the profit and loss account and balance sheet. With a cash flow calculation, your company's actual liquidity can be determined in advance. This allows you to prepare for possible shortage of financing, which can occur at the beginning of your company's operations, when expenses are accumulated before you generate income.
A cash flow calculation can be used as a sales tool, as it indicates how many products must be sold to cover the cash disbursements. In a growth company, a cash flow calculation helps the company find a suitable growth rate which does not jeopardise its liquidity.
The calculation consists of three cash flows:
The cash flow from day-to-day business operations consists of sales receivables and cash income as well as recurrent cash expenses, such as taxes, rent, wages and non-wage labour costs.
The cash flow from investments consists of the cash income and costs incurred by production issues with long-term impact, such as real estate and securities.
The cash flow from financing consists of the withdrawals and repayments of loans as well as changes to capital subject to a charge.
For small and medium-sized enterprises, it is practical to prepare the cash flow calculation using the direct method. This only takes into account cash receipts and expenses paid from the cash reserves, which enables you to determine if the company’s funds are sufficient for the expenses. The closing cash reserve is obtained by subtracting cash disbursements (such as purchases, fixed costs and taxes, interests and repayments) from the cash receipts (the initial cash reserve, sales and profits). In this case, the reviewed period is usually a month.
The indirect method is often used by investors. In this case, numbers from the profit and loss account and the balance sheet are used, i.e. the company’s cash flow is calculated on an annual basis.