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35.3 Cash Flow Analysis

Overview​

Cash flow analysis evaluates the movement of cash in and out of the business. Understanding cash flow is critical because profitability doesn't guarantee cash availability. Cash flow analysis helps identify cash flow problems and opportunities.

Statement of Cash Flows​

Cash Flow Categories​

Three Categories:

  • Operating activities: Cash from operations
  • Investing activities: Cash from investments
  • Financing activities: Cash from financing

Operating Cash Flow​

Operating Cash Flow:

  • Cash generated from operations
  • Most important for ongoing operations
  • Should be positive for healthy business
  • Indicates ability to generate cash

Investing Cash Flow​

Investing Cash Flow:

  • Cash used for investments (equipment, etc.)
  • Typically negative (investing in assets)
  • Indicates growth investments
  • Important for long-term growth

Financing Cash Flow​

Financing Cash Flow:

  • Cash from loans, equity, dividends
  • Can be positive (receiving financing) or negative (repaying)
  • Indicates financing activities
  • Affects capital structure

Cash Flow Ratios​

Operating Cash Flow Ratio​

Operating Cash Flow Ratio = Operating Cash Flow ÷ Current Liabilities

Purpose: Measures ability to pay current liabilities from operations

Interpretation:

  • > 1.0: Can pay current liabilities from operations
  • < 1.0: May have cash flow problems
  • Higher is better

Cash Flow Margin​

Cash Flow Margin = Operating Cash Flow ÷ Revenue

Purpose: Measures cash generation efficiency

Interpretation:

  • Higher: More cash generated per euro of revenue
  • Lower: Less cash generated
  • Industry-dependent

Cash Flow Patterns​

Healthy Cash Flow​

Healthy Pattern:

  • Positive operating cash flow
  • Sufficient cash for operations
  • Cash reserves
  • Ability to invest and grow
  • Ability to repay debt

Problem Patterns​

Problem Patterns:

  • Negative operating cash flow
  • Insufficient cash for operations
  • Relying on financing for operations
  • Unable to invest
  • Unable to repay debt

Cash Flow Forecasting​

Forecasting Process​

Forecasting Steps:

  1. Estimate cash receipts
  2. Estimate cash payments
  3. Calculate net cash flow
  4. Identify cash shortfalls
  5. Plan financing needs

Uses of Forecasting​

Uses:

  • Plan cash needs
  • Identify financing requirements
  • Plan investments
  • Manage cash flow
  • Avoid cash crises

Luxembourg Compliance Note​

Important Considerations:

  • Cash flow statement: Required for annual accounts (if applicable)
  • Cash management: Critical for business survival
  • Planning: Cash flow planning essential
  • Monitoring: Regular cash flow monitoring
  • PCN compliance: Cash flow must be PCN compliant

Think It Through​

Artisan Boulangerie is profitable but struggles with cash flow. They have slow-paying customers and seasonal variations. How can cash flow analysis help?

Concepts in Practice​

Cash Flow Analysis Example

TechLux Solutions cash flow analysis:

Operating Cash Flow:

  • Cash from operations: €50,000
  • Positive operating cash flow ✅

Investing Cash Flow:

  • Equipment purchases: -€20,000
  • Negative (investing in growth) ✅

Financing Cash Flow:

  • Loan repayment: -€10,000
  • Negative (repaying debt) ✅

Net Cash Flow:

  • Net increase: €20,000
  • Cash balance increased ✅

Analysis: Healthy cash flow, generating cash from operations, investing in growth, repaying debt.