What is cash flow?
Cash flow is the money that comes in during a year from the company's activity. It differs from profit because some costs are not a cash outflow that year. The main one is depreciation: the oven was paid for earlier, but its cost is spread over ten years.
Belgian annual accounts do not include a mandatory cash flow statement. In practice, a simple approximation is used: profit plus depreciation.
Calculate cash flow: the formula
Cash flow = profit for the year + depreciation
Profit (loss) for the year: item 9904. Depreciation: item 630.
A more precise calculation also adds back write-downs and provisions, and takes changes in stock, receivables and trade payables into account. Nummo uses the simple formula, so you can check it yourself.
Example: Bakkerij De Zoete Korst
The fictitious bakery made €24,000 of profit after tax. That profit includes €45,000 of depreciation: a cost, but no money that left the company this year. Adding it back gives a cash flow of €69,000.
- Profit (9904)€24,000
- Depreciation (630)+€45,000
- Cash flow€69,000
- Loan repayments−€30,000
- New oven−€35,000
- Left over€4,000
With that €69,000, the bakery repaid €30,000 of loans and invested €35,000 in a new oven. €4,000 was left over. That is the picture a bank wants to see: the business itself pays for repayments and investments.
- Step 1
Find the profit
Item 9904: profit or loss for the year, after tax.
€24,000 - Step 2
Add depreciation
Item 630.
€24,000 + €45,000 = €69,000
Cash flow, profit and EBITDA
| Figure | Calculation | At Bakkerij De Zoete Korst |
|---|---|---|
| Profit | after all costs, interest and taxes | €24,000 |
| Cash flow | profit + depreciation | €69,000 |
| EBITDA | operating profit + depreciation, before interest and taxes | €85,000 |
The difference between EBITDA and cash flow here is interest (€8,000) and taxes (€8,000). Those really have to be paid. That is why cash flow is closer to what is actually available for repayments.
How to read cash flow
- Positive and stable is good: the company generates its own money to repay loans and invest.
- Compare with the loan repayments due within the year (in item 42). If cash flow is smaller, the company has to refinance or use cash in the bank.
- A company can make a loss and still have positive cash flow if depreciation is large. That is sustainable for a while, but the machines will need replacing one day.
- Fast growth needs money for stock and open invoices. This simple cash flow ignores that: look at working capital for it.
Calculate it yourself
To calculate cash flow for another company, enter the figures from its annual accounts. The item numbers follow the Belgian format, which builds on the European Accounting Directive.