Cash flow statement and cash flow metric: formulas, analysis, and real-time control

There is profit in the report, sales are growing, but at the end of the month the question arises: where is the money and will it be enough for salaries, taxes, and supplier payments? The reason is often not that the business is unprofitable, but that profit and real cash inflows are generated at different times.

Cash flow shows the actual movement of a company's money, and the cash flow statement helps to see where money comes from, where it goes, and what the balance is at a specific point in time.

There is profit, but no money: why it is important for a business to see real cash flow

Profit does not mean that the same amount is already in the account. The Profit and Loss statement (P&L) is formed using the accrual method: revenue can be recognized even if the client has not paid yet. Cash flow, on the contrary, shows money when it has actually been received or spent.

For example, an installation company entered into a contract for €1 000 000. The client pays a 30% advance, and the rest in 60 days. For P&L, the fulfillment of the contract can generate revenue and profit in the current period, but only €300 000 will enter the account now. The remaining €700 000 actually remains accounts receivable until the moment of payment.

Let's imagine that the cost and expenses under the contract amount to €650 000. In P&L, the company sees a potential financial result of €350 000 in profit. But if in the same month it is necessary to pay suppliers, salaries, and other expenses amounting to €500 000, and only €300 000 was received from the client, the cash flow will be negative.

This is precisely the situation where there is profit, but no money. If at the beginning of the period there was €250 000 in the account, after such transactions only €50 000 will remain. The next large payment to a supplier can create a cash gap, even though according to P&L the business remains profitable.

That is why a manager needs both reports. P&L answers the question "is the business making money?", while cash flow answers "is there money to meet obligations now and in the near future?".

What is cash flow and the cash flow statement

Cash flow (or its Ukrainian equivalent "грошовий потік") is the movement of a company's money over a certain period: all actual inflows minus all actual outflows. This approach allows you to see not only the operating result, but also how the cash balance changes.

It is convenient to consider managerial cash flow in three areas: operating, investing, and financing activities. Operating activity is related to the core business, investing activity is related to the purchase or sale of long-term assets, and financing activity is related to raising and repaying financing.

The cash flow indicator

The cash flow indicator reflects how much the amount of available money has changed over the selected period. It can be calculated for a day, week, month, quarter, or another period - depending on which managerial decision needs to be made.

In its simplest form, two types of transactions are considered:

• inflows - client payments, advances, loans, other funds received;

• outflows - payments to suppliers, salaries, taxes, rent, purchases, investments, and other payouts.

The difference between them forms the net cash flow. If you add it to the balance at the beginning of the period, you will get the cash balance at the end.

Cash flow in the cash flow statement

Here it is important to distinguish between the official accounting report and managerial cash flow. According to NAS 1, form No. 3 is the "Statement of Cash Flows" using the direct method, and form No. 3-n is using the indirect method. Both forms reflect cash movement by operating, investing, and financing activities.

For small and micro-enterprises, the situation is different. NAS 25 provides for abbreviated financial reporting consisting of a balance sheet and an income statement, without a separate form No. 3.

This is an important distinction for an owner. The official report is needed for financial reporting, while managerial cash flow is needed for everyday decisions. Waiting for an annual report to understand whether there will be enough money for payouts next week makes no practical sense.

It is the managerial report that allows you to see cash flow by item, plan future payouts, and notice the risk of cash shortages in advance.

Cash flow formula: how to calculate the indicator

Basic cash flow is calculated as the difference between all cash inflows and outflows over a period. But for a more complete analysis, several formulas are used: from simple NCF (net cash flow) to operating cash flow by direct and indirect methods and free cash flow.

Let's take the same example of the installation company. During the month, clients actually paid €300 000, operating expenses were €450 000, and the company acquired equipment for €50 000.

Net cash flow formula

Net cash flow (NCF) shows the total change in cash over a period.

Formula:

NCF = all inflows - all outflows

In our example:

300 000 - 450 000 - 50 000 = - €200 000

Thus, during the month the company lost €200 000 in cash. If at the beginning of the period there was €250 000 in the account, €50 000 will remain at the end.

Negative NCF by itself does not mean a problem. For example, a business can purchase expensive equipment before the season and temporarily get a negative flow. It is important to understand the reason for the negative result and its impact on the future balance.

Operating cash flow by direct method

The direct method shows actual inflows and payments related to core operations.

Formula:

CFO = inflows from operating activities - payments from operating activities

In our example:

300 000 - 450 000 = - €150 000

Operating cash flow is negative: the core activity took €150 000 more than it brought in during this month.

Next, the investing flow is accounted for separately:

CFI = - €50 000

If there were no financing transactions:

NCF = CFO + CFI + CFF = - 150 000 - 50 000 + 0 = - €200 000

This breakdown is important for analysis. A negative total cash flow due to purchasing equipment is one situation. A negative operating flow due to clients systematically paying later than suppliers is completely different.

Cash flow formula by balance sheet (indirect method)

The indirect method starts not with actual payments, but with profit and adjusts it for transactions that affect cash differently than reflected in the financial result.

For a simplified example, let's assume that pre-tax profit is €350 000, depreciation is €50 000, accounts receivable increased by €700 000, inventory by €100 000, and accounts payable increased by €250 000.

Calculation:

CFO = profit + non-cash expenses - increase in accounts receivable - increase in inventory + increase in accounts payable

350 000 + 50 000 - 700 000 - 100 000 + 250 000 = - €150 000

The result matches the operating cash flow calculated by the direct method.

The main benefit of the indirect method is that it helps understand why profit does not turn into money. In our example, the main factor is the growth of accounts receivable: the company already has revenue, but has not yet received €700 000 from the client.

Free cash flow

Free cash flow (FCF) shows how much money remains after operating activities and necessary capital investments.

Simplified formula:

FCF = operating cash flow - capital expenditures (CapEx)

In the example:

- 150 000 - 50 000 = - €200 000

FCF is particularly useful when a business actively invests in equipment, vehicles, premises, or other long-term assets. It shows how much cash remains after supporting and growing operating activities.

Cash flow analysis

Cash flow analysis is not needed just to see a plus or a minus. Its task is to show where money comes from, what it is spent on, how stable the operating flow is, and whether there will be enough funds for future payments.

For an owner, it is important to look not only at the monthly total. A negative indicator due to a large one-time investment may be normal, while a positive result due to a loan does not mean that the business generates enough money independently.

5 indicators for weekly monitoring

1. Cash balance
How much money is currently available in accounts and in cash. This figure must be compared not only with yesterday's or last month's balance, but also with the amount of future mandatory payments.

2. Net cash flow for the week
Shows whether the volume of available funds is increasing or decreasing. What matters more is not a single number, but the dynamics over several weeks.

3. Operating cash flow
Answers the question of whether core operations generate money. If a business constantly has a negative operating flow, this is a reason to look for the cause in prices, expenses, payment terms, or accounts receivable.

4. Accounts receivable and overdue payments
A sale for which the client has not paid yet will not help pay a supplier's invoice today. Therefore, it is important to see not only the total amount of receivables, but also when each payment is expected.

5. Cash runway in days
Shows how many days the current balance will last at a given level of mandatory expenses. This helps to see the risk of a cash gap even before a zero appears in the account.

Warning signs in the cash flow statement

There are several situations worth checking regularly:

• profit is consistently positive, while operating cash flow is negative;

• accounts receivable are growing faster than cash inflows from clients;

• money is only enough until the next major payment;

• the business constantly covers operating expenses with credits or loans;

• positive NCF is formed mainly through financing, rather than core operations;

• planned inflows are regularly postponed to later dates.

Special attention should be paid to the quality of profit. If a company reports €350 000 in profit, but operating cash flow is – €150 000, this does not automatically mean that the business is unprofitable. But such a difference requires explanation - for example, due to deferred client payments, inventories, or other changes in working capital.

Managing enterprise cash flows: 6 steps

Cash flow management starts with a regular forecast, not with checking the account on the day of payment. The optimal approach for small and medium-sized businesses is to update actual cash flow and the forecast for the next 2-4 weeks on a weekly basis.

It is convenient to structure the process in six steps:

1. Collect all inflows and outflows
   Take into account not only bank payments, but also cash on hand, expected client payments, future purchases, salaries, taxes, and other obligations.

2. Categorize transactions by item
   For example: sales, purchases, salaries, taxes, rent, equipment, loans. This makes it clear which areas generate or consume money.

3. Compile a forecast for 2-4 weeks
   For each inflow and payment, not only the amount is important, but also the date. This is where the payment calendar comes in.

4. Compare plan and actual
   If a client was supposed to pay €200 000 on Monday, but paid only €100 000 on Friday, the difference should go into the plan-actual analysis.

5. Address the causes of variances.
   If client payments are regularly delayed, review contract terms, advances, or the process of working with receivables. If purchases are exceeded, check inventory and planning.

6. Set a minimum balance.
   A business needs its own safety cushion - an amount below which it is undesirable to fall. This does not guarantee the absence of cash gaps, but gives the manager a specific signal to act.

This approach shifts cash management from the "will we have enough until the end of the month?" mode into a forecasting mode: what payments are expected, where a deficit arises, and what decision needs to be made now.

How to track company cash flow in real time in Keruj

For daily management, it is not enough to compile data in Excel once a month. Information on inflows, payments, documents, and obligations must be interconnected so that the owner can see the current status and forecast without manual data collection.

In Keruj, you see the full picture of cash flow in the business: where funds come from, what they are spent on, and what payments are planned. Financial documents are the main tool that helps structure inflows and outflows. Based on this data, you can analyze revenues and expenses, plan payments, and assess in advance whether there will be enough funds for current business needs.

This makes it possible to move from manual spreadsheet consolidation to unified management accounting: what has already been paid, what money is due to arrive, what payments are planned, and what balance is formed after them.

To track not only the current balance but also the future financial situation, Keruj has a payment calendar. In it, you can see planned inflows and expenses and assess how they will affect available funds. 

This helps notice a possible cash gap in advance, agree on payment deadlines with clients, or revise the priority of expenses. As a result, the manager can plan payments taking into account expected inflows, rather than just reacting to the current balance.

Real-time reports instead of manual data compilation

When sales, documents, financial transactions, and payments are maintained in a single environment, there is no need at the end of the week to collect data from multiple spreadsheets and check them manually. Reports in Keruj are updated based on entered transactions, so the manager sees the current picture and can react faster to changes.

This is especially important when decisions need to be made today: whether a new purchase can be made, whether there will be enough funds for upcoming payments, or whether to expedite payment from a client.

Plan-actual and project economics

For project-based companies, total cash flow is not enough. It is important to understand how much cash a specific project brings, what expenses have already been incurred, what the plan-to-actual ratio is, and what financial result is generated.

In Keruj, project economics helps connect financial indicators with specific work. This is especially useful for installation, service, repair, and other companies where one large contract can last several months and have many related expenses.

As a result, Keruj helps to see current results, compare them with the plan, evaluate project economics, and respond to changes on time.

The manager does not need to wait for the end of the month to see a problem. If an expected inflow is postponed, accounts receivable increase, or a major payment is ahead, the information becomes the basis for a decision before a cash gap occurs.

Try Keruj for 14 days free to evaluate how to organize managerial cash flow in your company.

Conclusion: 3 key points and action for this week

Profit and cash are not the same thing

P&L shows the financial result, while cash flow shows the actual movement of funds. A company can be profitable and at the same time have problems paying current obligations.

Cash flow needs not only to be calculated, but also analyzed

It is important to look at operating flow, accounts receivable, future payments, cash balance, and the reasons for variances. It is this level of detail that helps to see the risk of a cash gap in advance.

Cash management must be regular

Weekly cash flow analysis, a payment calendar, and a forecast for 2–4 weeks give the owner more information for decisions than checking the account balance on payment day.

What to do this week: gather all expected inflows and payments for the next 4 weeks, categorize them by item, and determine the minimum balance below which the company should not fall. This alone is enough to see a future cash gap before it becomes a problem.