Cash flow analysis - calculating and analyzing

Cash flow analysis is increasingly important in an ever-changing society and an often unpredictable market. However, it is an extensive and rather time-consuming analysis to carry out, and the approaches may vary. Here we will go through how a cash flow analysis works, why you should do it and what to keep in mind when calculating and analyzing cash flow.

What is cash flow analysis?

A cash flow represents the inflows and outflows of a company. The purpose of a cash flow statement is to show changes in the company's cash and cash equivalentsover a period of time. When calculating the cash flow, you should only include the money that comes in and is paid out. Items from the balance sheet, such as untaxed reserves, should not be included in the cash flow analysis.

Any change in the market can affect cash flow both positively and negatively. This was particularly noticeable during the pandemic, when many companies across industries faced financial challenges.

Cash flow analysis of receipts and payments must be reported according to the Annual Accounts Act. Usually it is per financial year. It is a requirement for larger companies but optional for smaller companies. Using a template can facilitate the process and reduce the risk of mistakes.

How to do a cash flow analysis

There are two methods of conducting a cash flow analysis: the indirect method and the direct method. The indirect method is the most common. It starts with the reported profit minus tax, depreciation and amortization to get the cash flow from operating activities, before changes in working capital.

The direct method does not take into account the income statement and focuses only on cash inflows and outflows. It gives the cash flow before interest and taxes are paid.

Discounted cash flow analysis is often used to calculate future cash flows and determine the current value of the company or shares. These cash flows are calculated according to a set formula and presented in lower values.

Look at the cash flow from operating/financing/investing activities separately and then calculate and analyze each activity. The aim is to show how money moves within a company and it is important to know what the different analyses mean for the company and how they relate to each other.

Cash flow from operating activities

In terms of cash flow from operating activities, the focus is on money coming from the sale of services or products. It also includes receipts and payments of interest expenses, taxes, accounts receivable and accounts payable. A positive cash flow indicates that the company's money covers operating costs and any investments.

Cash flow from investing activities

This is money that is linked to investment activities, such as the purchase or sale of assets or the acquisition of other companies. But it can also be money generated from investments in securities, or the company lending money. A negative cash flow can signal large capital investments while a positive one can show sales or returns on investments.

Cash flow from financing activities

In the case of cash flow from financing activities, it is money coming in or going out of the company. For example, it includes shares issued or bought back, if the company has taken out a loan or paid a dividend to shareholders. Group contributions are also included in a cash flow statement. If the cash flow is positive, it may indicate that the company is financially strong.

How to analyze cash flow

In order to assess whether the company is financially sustainable and profitable enough to grow, you need to analyze and calculate the company's cash flow. You do this by analyzing both negative and positive cash flows, operating cash flows and calculating the company's free cash flow. These cash flow analyses can then form the basis of the company's cash flow budget.

Analyze negative/positive cash flow

A positive cash flow, where operating income is higher than net income, shows that the company has the potential to grow. However, if net income is greater than operating income, you will have a negative cash flow. You should analyze why, so you can fix it.

For example, the company may have made large investments, which is reflected in a positive operating cash flow and a negative investment cash flow. On the other hand, if the operating cash flow is negative and the investment cash flow is positive, it may indicate that assets are being sold to pay for the operation of the company.

Analyze operational/operating cash flow

The operating cash flow margin is a percentage of the company's sales revenue in a given period. If it is positive, the margin indicates that the company has profitability and earnings quality.

Calculate the company's free cash flow

Free cash flow is the assets remaining after operating costs and investments have been paid. This capital can be used to pay interest, reduce debt, buy back shares or expand through acquisitions.

Why you should do a cash flow analysis

Cash flow statements are valuable tools that show your company's financial situation. By analyzing the cash flow statement, you can assess the company's financial strength. This is not only useful for investors and equity analysts, but also gives the entrepreneur a clearer picture of the company's survivability and expansion potential.

Even if the company is performing well financially, there may be a shortage of cash, for example due to investments or high supplier demands. A cash flow analysis allows you to take timely action, such as taking out a loan to avoid a financial crisis.

A cash flow statement is also important for share valuation where free cash flow determines the value of the shares. It is also a key figure to show the company's profit and, as mentioned earlier, it can be used for reinvestment and dividends.

Make it easy with Mynt

In order to obtain correct values in the cash flow statement, all incoming and outgoing payments must be included. In order not to miss any transactions, there are now easy ways for companies to do this.

Mynts Business cards offer integrated expense management, making it easier to control incoming and outgoing payments. With the automatic recording and categorization of all expenses, you can quickly access all information when calculating cash flow. Other benefits include automated VAT calculation anddigital receipt management.

Sources

The tax authorities

Wolterskluwer.com

Visma SPCS

Björn Lundén