Know and analyze cash flows

Whether they are linked to the company's activity, its investments or its financing operations, cash flows are elements to be mastered in order to optimize the company's management. But what are these different flows and what indicators should be used to analyze them? The answers in this article. 

Cash flow from operations

Cash flow from operations (CFO) corresponds to the cash inflows and outflows generated by the company's main activity. They represent cash flows from sales, purchases of raw materials, salaries, social security charges and taxes, as well as all other items that directly affect the company's operating income.

Cash inflow from operations

The main operating cash inflows are sales of goods and services . These can be collected immediately, or be subject to payment terms such as 30, 60 or 90 days. It is therefore important to closely monitor customer payment terms in order to forecast short- and medium-term cash inflows and thus control working capital requirements (WCR).

Cash outflows from operations

Operating cash outflows correspond to expenses related to the company's main activity. This may include the purchase of raw materials, supplies, employee compensation, social security charges, taxes, etc. To control operating cash outflows, it is essential to monitor costs, negotiate with suppliers and optimize inventory management.

Key performance indicators for FTEs

FTE key performance indicators measure the financial health of the company and its ability to generate positive cash flow from its core business. The main FTE-related indicators to analyze are:

• Turnover: this represents the total amount of sales made by the company over a given period.
• The average customer payment time: it measures the time it takes for customers to pay their invoices. The longer the delay, the higher the risk of non-payment.
• The average supplier payment period: this measures the time it takes for the company to pay its suppliers. The longer the delay, the more surplus cash the company has.
• The operating result: it represents the difference between the company's revenues and operating expenses.

Cash flows from investing activities

Cash flow from investing activities (CFI) is the cash inflow and outflow from investing activities of the company. It includes the acquisition of long-term assets such as machinery, equipment and buildings, as well as financial investments such as shares and bonds. FIT is therefore linked to the company's long-term strategy and has a significant impact on its cash flow.

Cash inflows from investing activities

Cash inflows from investing activities correspond to amounts received from the sale of long-term assets or the disposal of subsidiaries. They may also arise from the sale of financial securities. These cash inflows are generally infrequent, but can have a significant impact on the company's cash position.

Cash outflows from investing activities

Cash outflows from investing activities are related to the company's capital expenditures. They can be large and can significantly affect cash flow. The main cash outflows from investing activities include the purchase of long-term assets such as machinery, equipment, buildings, or financial investments such as stocks or bonds.

FIT key performance indicators

FIT key performance indicators measure the impact of investments on the company's cash flow and its ability to generate positive cash flow from its investments. The main indicators related to FIT are:

• Investment cash flow: this represents the cash flow generated by the company's investments. If the investment cash flow is positive, it means that the investments have generated more cash inflows than outflows, and vice versa.
• The return on investment: it measures the return on investments made by the company. It is the ratio between the net profit generated by the investments and their cost. A high ROI means that the investments were profitable for the company.
• The payback period: this measures the time required to recover the amount invested. The shorter the payback period, the more profitable the investment is considered to be.

Cash flows from financing activities

Cash flow from financing activities (CFT) corresponds to the cash inflows and outflows related to the company's financing activities. They include, for example, borrowings, debt repayments, share and bond issues, and dividends paid to shareholders. FTFs are therefore linked to the company's financing choices and condition its financial structure.

Cash inflows from financing

Cash inflows from financing activities correspond to amounts received from borrowings, share and bond issues, and the sale of debt securities. They may also come from the contribution of capital by shareholders. 

Cash outflows for financing

Cash outflows from financing activities correspond to debt repayments, share buybacks and dividend payments to shareholders. They may also include share and bond issue costs.

Key performance indicators for FTFs

FTF key performance indicators measure the impact of financing choices on the company's cash flow and its ability to generate positive cash flow from its financing activities. The main indicators to monitor for FTFs are:

• Financing cash flow: this represents the cash flow generated by the company's financing activities. If the financing cash flow is positive, it means that the financing activities have generated cash inflows greater than outflows, and vice versa.
• The debt ratio: this measures the proportion of debt in the company's financial structure. The higher this ratio is, the more indebted the company is and the more vulnerable it is to interest rate fluctuations.
• ‍Theweighted average cost of capital (WACC): measures the total cost of financing the firm, taking into account the cost of debt and equity. A high WACC indicates that the firm has significant financing costs.