What is a cash flow statement and how does it work? 

Here we will tell you everything you need to know about the phenomenon of cash flow statements, such as what they are and why they are used. We will also explain the concept of cash flow as it is so closely linked to cash flow analysis. 

What is a cash flow? 

A cash flow is the amount of money that goes in and out of a business over a certain period of time. With its cash flow, the company can pay salaries and invoices from suppliers, among other things. There are a total of three types of cash flows which are: 

• Cash flow from operating activities, such as income from sales. 
• Cash flow from investing activities, such as investments in machinery and acquisitions of other companies. 
• Cash flow from financing activities, such as new issues, dividends and loan repayments. 

Free cash flow

There is also a concept called free cash flow, which is the surplus left over after investment and capital expenditure costs have been deducted. So you calculate free cash flow by taking "operating cash flow - capital expenditure = free cash flow of the company."

What is a cash flow statement? 

A cash flow statement is a process that examines a company's cash flow, i.e. the cash inflows and outflows during a given period, with the aim of understanding the financial situation, in particular whether income covers expenditure. 

Why do you do a cash flow statement? 

A clear benefit of conducting a cash flow statement is that it allows all stakeholders of the company to know the financial status of the company. Examples of stakeholders who often benefit from the cash flow statement are lenders, venture capitalists and banks. 

Similarly, a cash flow analysis provides a better understanding of whether the company will be able to cope with future challenges, such as recessions, loan repayments and competition from other companies, without deteriorating its financial position. 

A cash flow analysis also makes it easier to identify and fix problems. For example, you may find a cost item that is too large, such as hiring staff, and then fix the problem.

Larger companies are usually required by law to carry out a cash flow statement, but many companies carry out cash flow statements even if there is no legal requirement to do so. This is because of all the benefits a cash flow statement provides. 

What does a cash flow statement template look like? 

The form of a cash flow statement depends on whether the direct or indirect method is used. According to the Swedish K3 regulations, the indirect method must be used, but companies that apply IFRS may instead choose between the direct and indirect methods. In practice, the indirect method is most often used because it is easier to produce. 

The direct method involves listing the company's actual receipts and payments, which gives a clear picture of cash flow. The indirect method is based on the company's profit or loss and then adjusts for items that do not affect cash flow, such as depreciation. Regardless of the method, the cash flow statement is usually divided into three sections: operating activities, investing activities and financing activities. When you have added up the sum of the three flows, you then get your company's cash flow for the period. 

How to make a cash flow statement? 

A cash flow statement using the indirect method (which is the most common) is done as follows: 

1. Collect key financial data from the income statement and balance sheet. 
2. Break down all income and expenditure into the main categories that exist, i.e. from operational, financing and investment activities. 
3. Analyze the results to see, among other things, what problems exist and how to address them. 
4. Comparing different cash flows will give you a deeper insight into the shape of key financial trends and variances. You can use this information, among other things, to analyze how your company is doing. 

Frequently asked questions

Below we answer frequently asked questions on the topic of cash flow analysis. 

Is cash flow the same as profit?

No, they are not the same thing. A company's profit is the sum of revenues minus expenses, while a cash flow serves as a mapping of how money moves inside and outside the company. A company can have a high profit, but still have a negative cash flow even if they have large outstanding debts and/or capital expenditure.

What are the three components of a cash flow? 

The three main components of a cash flow are: operating activities, investing activities and financing activities.

What is a positive cash flow?

A positive cash flow means that the company receives more money than it spends in a given period of time. 

What is a negative cash flow?

A negative cash flow means that a company spends more money than it earns. 

How can a business improve its cash flow? 

Companies can improve their cash flow by, for example, reducing costs, increasing revenue and selling assets.