What is cashflow?

What is cashflow?

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Cash flow is one of the main indicators of the financial state of a company that you have to know

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We can define the cashflow as the cash flow.or treasury, although more than a definition is a translation. We will see what information is available on the financial status of our business or company.

A businessman or a manager who knows how to read a balance sheet, is a profit and loss account, is something inexcusable nowadays, no matter how financial is not within his competence. But this is not enough, you have to know how to match it with reality. And the reality is liquidity, the treasury. And what is cashflow?

It is a term that is still used, although it has given way to the advance of others such as EBITDA. In any case, the most important thing is to understand the reasons why it is used, its limitations and how we can use it. In these points we will focus instead of delving into classifications and ways of calculating it,

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The accounting and the cash

One of the main problems when carrying out an accounting analysis is to reconcile with our financial reality. This is the case for the first impression of their accounts, which have empty boxes. In times of crisis, beyond the results, the treasury of the company is taken care of, and that is where we started to run into the concept of cashflow.

We can define the cash flow as the cash flow or treasury. But that, more than a definition, becomes a translation. So let’s look at what usually happens in schools.

Cashflow: Profit + amortizations + provisions

As we can see, a cash flow is an indicator in which amortizations and provisions are added to the benefits in a given period. Why is this done? If we understand the answer to this question, we will begin to realize the task that lies ahead and the size of the problem.

Depreciation is not an outflow of money. They imply a reduction in the result of the year, but do not imply a disbursement. The cash, the treasury is still there. The same happens with provisions.

As we can begin to imagine, which is of capital importance. But it will not be so easy.

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What’s the point of talking about cash flow?

Going beyond the benefits and getting to talk about cashflow can be very useful. It is a first step to know our financial health, the progress of it, its evolution. And we can get to answer the questions about whether we will be able to fulfill our payment commitments.

Do we generate enough cash to meet our suppliers? And with our creditors? How will an investment impact the expected cash flow?

Due to the origin of the different types of cash flow will be due to the origin: the operational call, the one coming from investments or divestments and that derived from financial operations. .

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The limitations to calculate the cash flow

The formula that we have given to calculate the cashflow is the best known and pledged, is the so-called accounting cash flow. It may be interesting, especially for comparative purposes, and it is given by the accrual rule.

The key is that accounting being a treasury, and this is not the case in reality. That we have billed to salt and we have actually collected it. It is a very good thing that it is a deferred sale, and therefore, part of the sales of an exercise. And if things go wrong, those deferred sales will not be charged and we have already counted them as one euro more in our pockets.

It is about understanding its limitations and it is about understanding its limitations. This is the case for direct or indirect estimation of our treasury flows (in situ study of the treasury, evolution of the State of Origin and Applications of Funds, etc.). ).

The limitations of accounting make it necessary to equip them with instruments, whatever they may be, to test the current and anticipated levels of treasury.