What is cash flow and why is it important?

Anyone who has delved a little into the topics of accounting and bookkeeping has probably also heard of the term "Cashflow" or "Statement of Cash Flows." But what exactly does this term entail and why is Cashflow so important? In this blog post, we want to answer these questions and provide a brief overview of the cash flow statement.

What is Cashflow?

Cashflow is a financial metric that represents the inflow and outflow of cash within a specific period. It shows how much money, or cash, a company actually receives and spends. Unlike profit, which includes non-cash revenues and expenses (such as depreciation), Cashflow focuses exclusively on actual cash movements.

Why is Cashflow needed?

Cashflow is a central tool for the financial management of a company. It serves several purposes:

1. Liquidity analysis: Cashflow provides information on whether a company has enough liquid assets to cover its current liabilities.
2. Financial planning: Cashflow can better assess and plan the future financial situation of a company.
3. Investment evaluation: Cashflow helps to assess whether a company is able to invest in new projects, repay loans, or distribute dividends.
4. Company valuation: Investors and analysts use Cashflow to evaluate the financial health and value creation capability of a company.

 Why Cashflow is so popular for analyzing companies

Cashflow is particularly popular for company analysis because it offers a clear and unadulterated view of a company's financial health. Unlike other metrics that can be affected by accounting tricks or different accounting methods, Cashflow shows the actual cash flows. This makes it a reliable indicator of the company's liquidity and operational efficiency. Moreover, Cashflow reveals a lot about a company's ability to settle debts, invest in growth, and distribute dividends, making it especially valuable for investors.

Structure of the cash flow statement according to Art. 961 OR

According to Art. 961 of the Swiss Code of Obligations (OR), the cash flow statement includes the following main areas:

1. Cashflow from operating activities:

This includes all cash receipts and payments resulting from regular business operations. This encompasses income from sales, expenditures for suppliers, wages, and other operating costs.

2. Cashflow from investing activities:

This section includes cash inflows and outflows related to the acquisition and sale of long-term assets such as real estate, machinery, and other fixed assets.

3. Cashflow from financing activities:

This covers financial transactions that affect equity and long-term liabilities. This includes borrowing and repayment of loans, issuance and redemption of shares, and dividend payments.

Conclusion

Cashflow is an essential metric for the financial health of a company. It provides valuable information about liquidity, financial planning, investment opportunities, and the company's overall performance. Through accurate analysis of Cashflow, companies and investors can make informed decisions and better assess financial stability.

For anyone dealing with finances, understanding and analyzing Cashflow is indispensable. Fortunately, there are many templates available online that can help create such a cash flow statement.

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