Thorough bottom-up planning that includes operational planning elements is crucial for the success of a company. An essential tool here is the cash flow statement, which makes the company's liquidity transparent in the business plan.

What is cash flow and why is it important?

Cash flow is the amount of cash that flows into or out of a company as it carries out its operating, investing and financing activities. It is the most important planning parameter in operations as it ensures the company's liquidity.

How do you calculate cash flow?

Cash flow consists of three main components:

• Cash flow from operating activities: This cash flow measures the amount of cash generated by the company's regular business operations. It includes income and expenses from the sale of goods or services, as well as all operating costs.
• Cash flow from investing activities: This cash flow refers to the funds used to purchase or sell long-term assets such as plant, equipment or real estate.
• Cash flow from financing activities: This cash flow refers to the funds generated by raising debt or equity, as well as by repaying debts or paying dividends.

What is Free Cash Flow to the Firm (FCFF)?

Free cash flow to the firm is the amount of cash remaining after deducting operating expenses, capital expenditures, and debt costs. It is an important metric for valuing a company and is often used in discounted cash flow valuation methods.

Why is cash flow important for valuing companies?

The valuation of companies is often based on discounted cash flow statements, which calculate the value of a company based on its future cash flows. The cash flow statement provides the data basis for these calculations and enables investors to determine the value of a company.

Which liquidity ratios are important?

Two important liquidity ratios from financial theory are the current ratio and the quick ratio. The current ratio measures a company's ability to cover short-term liabilities with short-term assets, while the quick ratio is a stricter version of it and only takes liquid assets into account.

Conclusion

The cash flow statement is an important tool for business planning and evaluation. It allows entrepreneurs to analyze their liquidity and ensure that they have enough cash to maintain their operations. Thorough bottom-up planning and consideration of operational planning elements are crucial for creating a meaningful cash flow statement in the business plan.