Cash Flow


Cash flow is maybe the main tool for analyzing a company. It actually shows the money that comes in or leaves the company’s cash, exposing the cash cycle from moves within the cash and cash equivalents. A company may have lots of money coming from sales and still not being a profitable business. Other companies can make profits from relatively low sales or income. Thus, the cash flow involve all payments and receivables in general, but looking a bit further on how are they being effective or not in providing cash to the company.

The cash flow can either be calculated by looking at past entries or using forecasts for future entries, and making adjustments as the time goes by. Also, the cash flow can be used for analyzing projects, in order to find whether are they viable or not, or if they worth the investments made.

As it happens for financial statements, cash flow reports refer to a specific date, not a period, and for that reason they use to be published together with the company’s statements and results, quarterly and annually, in most cases. Results usually show the company’s performance for a period in particular, and consider both revenues and expenses for the period observed, as well as those which haven’t been paid or received. So, that means a company can have high profits in a period, but has its cash reduced. Likewise, some occurrencies may affect the results, but have no incidence on cash flows, such as depreciations. Depreciations appear as an expense on both results and balance sheets, but no cash is actually spent on them.

The cash flow starts as the operational cash generation, from net profits made plus the depreciation and ammortization, once these accounts do not directly affect the cash position, once they represent what has already been spent years ago. After that, we take all expenses in fixed assets made by the company and their consequences to the cash levels. In this stage, we calculate any income or expense from assets which have been purchased or sold. Lastly, we take all financing activities, or gains made by the company from financial investments, contracts or operations. Payments of dividends come here as deduction from cash, as well as buy back operations. In summary, the final cash position can be determined by the sum between the operational cash generation, the investments made and financing balances.

There are two ways of getting the cash flow, as follows:

Direct approach: in this method, one can have an analytical view of the company’s income and expenses. The main payments and receivables can be found by looking at the balance sheets, from changes within inventories, payable and receivable accounts, adjustments of sales and costs and other items that are not directly related to the cash.

Indirectly apporach: that leads to the cash changes, but with less information. It is found by adjusting the net profits (or losses) from changes happened in a period on inventories, payable and receivable accounts and other accounts non related to the cash, such as depreciation, provisions, general taxes, exchange floats, net assets adjustments from investments and equity moves and other items whose changes indirectly affect the cash flow as investments or financing.

We are going to describe and explain the main accounts that comprise a cash flow report, and show why is this report crucial to analyze a company and find whether it is profitable or not, if it has a good cash generation and if the companyis potentially healthy or can be subject to financial and economical problems in the near future. Below, an example of cash flow report from Companhia Siderúrgica Nacional – CSN, back to the Q2 2013 (brazilian method):

 fluxo de caixa csn

Operational Activities

The cash flow from operational activities is basically a result from the main cash generating activities of a company. In a healthy company, the amount produced from operational activities have to be enough for facing all expenses, pay loans back, pay dividends and interest on own capital, making new investments and keep generating cash in the following exercises, in an everlasting cycle. The main accounts which generate cash are listed below:

Accounts receivable

Include all payments made by customers in a period, from products and services sold by the company. If a company sells something deferred, future payments shall not be included here, as they were not paid so far. To make the cash flow report easier to find, the turnover can be found within the company’s report and notes receivable taken from the financial statement. If any losses occur on the sales activity, they must be taken in account, like allowance for doubtful accounts, for example.


This account list all payments to be made for suppliers. Just like the accounts receivable, suppliers can be paid in installments or in a future date. Thus, the account is calculated by taking all purchases made in a period, plus all debts with suppliers from previous exercises. In a retail company, this account is equivalent to the cost of goods sold minus the change of the company’s inventories. In the case of an industry, both inventories and the cost of goods sold contain labor costs and other indirect costs not related to the suppliers’ account.

General expenses/ Salaries and Benefits

Here all expenses and salaries are launched together. The thinking follows the previous accounts. Companies need to pay for fixed costs like rents, utilities, as well as the payroll and benefits. These expenses paid during a period will compose the general expenses and salaries accounts for the cash flow calculations. If expenses are paid in advance, they also need to be accounted. The logic is that first the company pays the expenses for after appropriating them in proportion to consumption. Thus, as there was an actual cash outflow, the prepaid expenses should be computed.

Taxes and Contributions

Comprise all costs of taxes and contributions that companies must pay on net income in the period represented. Any use of cash to pay taxes must be included in this account.

Financial costs and interests

All financial expenses, including fees and interests from loans, debentures and bonds need to be included in this account. As financial costs are tied to the loans themselves, anticipate interests and costs can be a difficult task. For this reason, the most common for companies is just describe all interests and fees paid in the considered period of time.

Financial revenues

Financial revenues are those resulted from investments. When a company has a good cash position, it uses to invest in financial assets, funds, shares and any other asset, which eventually generates profits or interests. Gains from investments are also part of a company’s cash flow, because there was an effective gain of money during the period analyzed.

Depreciation, depletion and amortization

Depreciation means the allocation costs of a material asset over its useful life, like an equipment or machine used on production. The amortization corresponds to the loss of the value of capital invested in the acquisition of rights of industrial or commercial property and any other in existence or exercise of limited duration. Already depletion refers to impairment due to operation being these natural resources, such as a deposit of mineral or an oil. When the company has a cash disbursement to pay any expense on depreciation, depletion or amortization, it should be computed on the cash flow.

Deferred IRPJ/CSLL

Cash flows related to taxes and social contribution on net income should be shown separately as cash flows from operating activities unless they can be specifically related to investing and financing activities. When tax cash flows are allocated to more than one class of activity, the total amount of taxes paid in the period should also be disclosed

Investment activities

Investment activities comprise company’s expenses looking forward to generate results and future cash flow. If the company spends money with machinery, buildings, equipments and other assets, it looks for increasing the output and renew the investment cycle. The main investment accounts include:


Any payment or disbursement from the cash for acquiring permanente assets or intangible assets, as well as long term assets. That include development and construction costs, or a property for example. Profits can be eventually made from these assets, in an eventual sale of assets for prices above those the company paid. Takeovers and acquisitions between companies are also accounted ans investment activities.


Involve payments or receivables from future contracts, forward markets, options and swaps, since these contracts are not scheduled for immediate negotiation or the payments are classified as financing acitivities. If the company maintains derivative positions to hedge the cash flows of the contract shall be classified in the same way as so classified cash flows of the position that is being protected.

Financing activities

Financing activities are the cash flow sourced from debentures, bonds, loans, moving assets, mutual contracts and other short and long term loans. When a company gets cash from those activities, they figure as “financial activites”, and once there was an  income,  the cash may appear in the current cash flow. The main accounts inside the financial acitivities are:

Increase in capital

If the company’s stakeholders make a decision to further invest in the company, the capital raise must appear inside this account, and also be written down in the periodic reports.

Long term financing

All investment or financing activities which are part of a company’s planning. They are strategic planned by using own capital or third parties’ loans. To get money from third parties, it is necessary to issue a debt, as a debenture, or will need to issue shares and sell them in the market. When the company ends up funding resources must be registered on its books, and cash flow, should appear in financing activities.

Free cash flow

The free cash flow represents the movement cash to operating, investment and financing activities. If we add up the total of operating activities, total activities and investments and the total financing activities, we find the free cash flow. FCF will tell if there was incoming or outgoing money in the company, in the analyzed period. It is very important to analyze past periods, to see if the input or output cash flow has been frequently or if it’s just momentary. If the company has difficulties in generating cash, it is very common that the trend in the volume of investment decreases, in order not to commit more cash. Incidentally, the worst that can happen to a company is the lack of cash, because that way it can not pay the bills, employee salaries, lack the resources to reinvest in the company and end up having to close the doors.

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