In today’s financial world, there is one term that stands out above the rest due to its importance. The cash flow. Cash flow is one of the most important calculations in the field of treasury and finance, and it is very important to note that it is not the same as the profit and loss statement, for example, although a priori they are very similar.

As we said at the beginning of the article, cash flow has become the quintessential financial calculation. It could even be said that it is much more important than the profit and loss statement because it measures the net variation or effect of transactions in the company’s cash register.

Before we get into more detail about the cash flow application, let’s start with the basics. What is cash flow? Let us remember that this is a calculation closely related to the field of treasury. As we explained in one of our first articles, the treasury historically refers to the financial area that manages the inflows and outflows of money from a company. Therefore, cash flow is a calculation by which finance personnel analyze the situation of the company from a cash point of view, or actual inflows and outflows of capital or money.

Cash flow is totally different from the profit and loss statement. It is true that the format of the analysis can be similar in both cases. However, the profit and loss statement tries to record all accounting events that occur in a company in a given period, normally they are recorded month by month. However, the profit and loss statement is based on accounting standards, which aim to record accounting events based on accounting standards. Cash flow, however, is not based on accounting rules, but actually monitors everything that happens from a cash point of view, that is, how much money comes in, and how much money goes out, in a given month. Accounting is therefore based on the accrual principle or “accrual accounting”, and cash flow is based purely on money inflows and outflows.

Let’s give an example. A Company A sells a car in March for 20,000 euros, but does not collect from the customer until June. Accounting, the company’s sales in March will register a balance of 20,000 euros for the sale of the car. However, from a cash flow point of view, the sales in March are 0, because that sale was not collected until June. As you can see, both cases are very different.

Cash flow is mainly used in two areas. In the first place, in the area of ​​finance and treasury of companies. It is the most effective way to assess how much money has come in and how much has come out in a given period. It could be said that it is the most basic form of accounting. No principles or rules. Just how much goes out, and how much comes in.

Secondly, the other area where the cash flow calculation is used a lot is in investment banks, and in investment funds. The valuation of companies for purchase and sale transactions is carried out mainly based on cash flows. In this area, although accounting is also important, because it can impact cash flow through taxes, etc., the main analysis is the net cashflow of a company. That is, how much money or cash is generated by the business in a period of 5, 10, 20 years. If I pay a value determined by the company. What profitability does the present value of that box that the business generates year after year generate for me?

In conclusion, net cashflow generation is the main metric that is looked at when analyzing a business.

Direct Method:

The direct method is perhaps simpler. It basically consists of listing all cash inflows, and outflows, one by one, until obtaining the net result of cash flow.

Indirect Method:

The indirect method is not so obvious, although for large companies it may be the most appropriate method since it can be easier if the company has millions of movements. To calculate the cash flow by the indirect method, we start from accounting, that is, from the result of the year.

Subsequently, what is done is add or subtract to the accounting result of the year all those movements that do not mean a change in the cash of the business. For example, amortizations and depreciations, or provisions among others. This method is the one represented by the well-known Statement of Cash Flows that the Annual Accounts contain in their financial information.

Cash flow can be divided into three sections, which we list in this section.

• Cash Flow from operations
• Cash Flow from investments
• Cash Flow from financing activities

The cash flow from operations refers to the cash inflows and outflows purely related to the business, that is, with sales and the costs associated with them.

Investment cash flow refers to cash outflows related to investment in furniture, etc.

Finally, the cash flow from financing activities refers to the inflows and outflows related to the sources of financing. In other words, in this section, the income or financial expenses for interest will appear, the cash receipts due to closing an investment round, or closing a bank loan.

The total of the three parts of the cashflow will result in the net cash flow of the company.

The quintessential tool to make a complete calculation has traditionally been the spreadsheet or Excel. In all companies and in companies that are dedicated to the field of investment, cash flow estimates are made by means of very extensive and exhaustive financial models in Excel.

On the other hand, technology today allows estimating cashflows with automated systems. Systems such as the one created by Snab allow you to see and calculate the cashflow statement of a company from a digitized place, and from where you have access to all the information related to cash, from your banks, your invoices, etc.

Snab is a technological platform that, through a pioneering software in the cloud, allows, among other things, to automate the treasury management of companies. It is a “plug & play” platform that allows companies to pay their suppliers in a few clicks, regaining full control of the accounts payable and supplier payment process. In addition, the platform provides the appropriate and necessary information on treasury at the time of payment, thus facilitating decision-making when making payments to suppliers.

Snab automates the receipt of invoices, the extraction of their data with OCR scanner technology, digitizes the approval management of said invoices through the creation of “workflows” or approval flows, and finally allows them to be paid in one click, without having to leave the platform.