In accounting, the profit of a period is defined as the difference between income and expenditure. The idea, however, would be wrong to see profit as a “ringing coin” in the company's cash register.
There is income that was not associated with deposits in the corresponding period. For example, products and services are sold, but the customers and buyers pay the bills later.
On the other hand, and this is positive for the receipt and stock of cash, there are expenses that are not associated with payments in the period. This includes depreciation and the creation of new provisions. With the term cash flow, profit is transferred to the level of cash.
The cash flow of a period is defined as the difference between the cash (cash) income and the cash (cash) expenses of a company in one year. The cash flow is therefore, just like expenditure, income and profit, a period variable.
One would be tempted to understand cash flow as that part of profit that has flowed into it as money. However, the amount of the cash flow is often greater than the profit. This is due to the fact that important items of the expense are not cash-effective (non-cash) and are not associated with disbursements in the same period. This includes depreciation and the net allocations to provisions.
The cash flow shows the means of payment that management or equity providers can dispose of at least for a certain period of time. If, for example, a machine is written off and the products produced with the help of the machine are sold and the sales proceeds flow in as a means of payment, the management could initially invest the amount of money in the amount of the depreciation until a replacement of the machine is due, for example a financial investment could be made which is in the spirit of the equity provider.
With the given definition, interest payments are not part of the cash flow; they are cash expenses. However, there are variants of the cash flow in which the interest payments are not deducted. In this way, a cash flow is determined for the benefit of all capital providers, including the outside capital providers. In that case, all expenses affecting cash payments except for the interest paid are deducted from the cash-in income. You have to be careful here because in many cases it is not specifically emphasized which definition was used as the basis for determining the cash flow.
When it comes to the cash flows in the coming years and the data required for this is taken from budgeting or the business plan, this point is often at stake: In many cases, the business plans require certain investments.
The difference between cash flow and the payments for these investments is the so-called free cash flow, or FCF for short. Attention: Here neither replacement investments nor expansion investments per se are meant.
To determine the FCF, the payments for precisely those investments are deducted from the cash flow, the implementation and realization of which is a prerequisite for the cash flows to be realized as set out in the business plan.
Vielfach ist der FCF daher geringer als der Cashflow. Bewirkt eine solche Maßnahme Einzahlungen etwa bei einer Divestment bewirken diese Einzahlungen, daß der FCF den Cashflow übertrifft.
Something else is important: If the cash flow of a past period is calculated, the figures can be taken from the annual financial statements. When it comes to the cash flow of a future period, the data must be taken from the business plan. In the latter case, it is an estimate of an uncertain quantity, which is why one should speak more precisely of expected cash flows (which nobody does).
Auf den Cashflows oder auf die Freien Cashflows konzentrierte Beurteilungen der Unternehmung zielen auf die Internal financing, auf die Kreditkapazität und auf den Unternehmenswert: Die drei Fragen lauten:
1. What is the potential for internal financing? What “financial strength” does the company have for an investment policy that is independent of capital increases or borrowing?
2. What is the company's ability to repay loans?
3. How high is the company's value?
The cash flow can be determined by dividing the income into two groups, depending on whether they were, are, or will be associated with deposits in the same period. Likewise, the expenses are divided into two groups depending on whether there is a connection with payouts in the same period or not. The cash flow is the difference between cash (cash-in) income and cash (cash-out) expenses.
This method of calculation is called direct. There is a second, indirect calculation. It first equates cash flow with profit, but reduces it by income that is not a deposit and increases it by those expenses that are not a payment. Cash flow is equal to profit minus non-cash income plus non-cash expenses.
Annual surplus / deficit
+ Depreciation on fixed assets
+ Write-ups on fixed assets
+/- changes in provisions for pensions and similar obligations or other long-term provisions
+/- change in the special item with a reserve portion
+/- Other material non-cash expenses or income
Annual cash flow
+/- Significant, unusual cash expenses or income
Cash flow according to DVFA / SG
The direct method is hardly accessible to external analysts, which has led to the widespread use of the indirect method. Here is the version of the indirect method proposed by the German Association for Financial Analysis (DVFA) and the Schmalenbach Society (SG).
Two other terms are directly linked to the indirect calculation: The gross cash flow is understood as cash flow if all changes in current assets are excluded. This means that the gross cash flow can practically be equated with the sum of profit and depreciation. In the case of net cash flow, changes in current assets are taken into account, i.e. the net cash flow corresponds to the cash flow as defined.