Here we explain everything you need to know about the cash flow statement (in Swedish, kassaflödesanalys), such as what it is and why it is used. We will also explain the concept of cash flow, since it is so closely connected with the cash flow statement.
What is a cash flow?
A cash flow is the amount of money that goes into and out of a company over a certain period. With its cash flow the company can, among other things, pay salaries and invoices from suppliers. There are three types of cash flow in total:
- 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 share issues, dividends and loan repayments.
Free cash flow
There is also a concept called free cash flow, which is the surplus that remains after the costs of investments and capital expenditure have been deducted. You therefore calculate free cash flow as “operating cash flow – investment costs = the company's free cash flow.”
What is a cash flow statement?
A cash flow statement is a process that examines a company's cash flow, that is, the payments in and out during a certain period, with the aim of understanding what the financial situation looks like, above all whether income covers expenses.
Why prepare a cash flow statement?
One clear advantage of preparing a cash flow statement is that all of the company's stakeholders find out what the company's financial position looks like. Examples of stakeholders who often benefit from the cash flow statement are lenders, venture capitalists and banks.
Likewise, a cash flow statement gives a better understanding of whether the company will be able to cope with future challenges, for example recessions, loan repayments and competition from other companies, without its financial position weakening.
It also becomes easier to identify and fix problems with the help of a cash flow statement. For example, you might find a cost item that is far too large, such as hiring in staff, and then fix the problem.
Larger companies usually have a statutory requirement to prepare a cash flow statement, but many companies prepare cash flow statements even when there is no legal requirement to do so. This is thanks to all the advantages a cash flow statement offers.
What does a cash flow statement template look like?
What a cash flow statement looks like depends on whether the direct or the indirect method is used. Under the Swedish accounting framework K3 the indirect method must be used, but companies applying IFRS may instead choose between the direct and the indirect method. In practice the indirect method is most often used, as it is easier to prepare.
The direct method means listing the company's actual receipts and payments, which gives a clear picture of the cash flow. With the indirect method, you instead start from the company's profit and then adjust for items that do not affect cash flow, such as depreciation. Whichever method is used, the cash flow statement is then usually divided into three sections: operating activities, investing activities and financing activities. Once you have added up the totals for the three flows, you arrive at your company's cash flow for the period.
How do you prepare a cash flow statement?
A cash flow statement using the indirect method (which is the most common) is prepared as follows:
- Gather key financial data from the income statement and the balance sheet.
- Divide all income and expenses into the main categories, that is, operating, financing and investing activities.
- Analyse the result to see, among other things, what problems exist and how they can be fixed.
- Compare different cash flows with each other, as this gives you deeper insight into how important financial trends and deviations are shaped. You can use that information, among other things, when analysing how the company is doing.
Below we answer frequently asked questions on the subject of cash flow statements.
Is cash flow the same as profit?
No, it is not the same thing. A company's profit is total income minus costs, while a cash flow works as a map of how money moves into and out of the company. A company can have a high profit but still a negative cash flow if it has large unpaid debts and/or investment expenditure.
What are the three components of a cash flow?
The three most important 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 takes in more money than it spends over a certain period.
What is a negative cash flow?
A negative cash flow means that a company spends more money than it earns.
How can a company improve its cash flow?
Companies can improve their cash flow by, for example, cutting costs, increasing income and selling assets.
