What is the DRE?The Income Statement, called DRE in Brazil (short for Demonstração do Resultado do Exercício), is a financial statement, prepared at least once a year, that presents the company's economic performance in the period: revenues, costs, expenses and the resulting profit or loss. Listed companies also publish it every quarter.It is through the DRE that managers assess whether the business operated at a profit or a loss. For the report to be faithful, all revenues, costs and expenses must be recorded on the accrual basis.Thus, a good analysis of the DRE helps to understand the company's economic situation and provides the basis for profitability and return ratios.What is the DFC?The Statement of Cash Flows, called DFC in Brazil (Demonstração dos Fluxos de Caixa), is the financial statement that shows where the company's money came from and where it went during the period. It is governed by Technical Pronouncement CPC 03 (the CPCs are the Brazilian accounting standards, aligned with IFRS; CPC 03 corresponds to IAS 7) and separates the flows into three groups:Operating activities: receipts from customers, payments to suppliers, salaries, taxes, etc.;Investing activities: purchase and sale of fixed assets, intangible assets and interests in other companies;Financing activities: loans taken out and repaid, capital increases, dividends paid to shareholders.The DFC can be prepared using the direct method, which lists cash receipts and payments, or the indirect method, which starts from net profit and adjusts it for items that did not move cash (such as depreciation) and for changes in working capital.In which group of the DFC does CPC 03 recommend presenting dividends paid to shareholders?Answer: Financing activities — dividends paid are the return to those who finance the company with equity, just as loans are the return to those who finance it with debt. CPC 03 even allows classifying them as operating, but financing is the preferred choice.Actual cash flow and projected cash flowIn day-to-day management, the term 'cash flow' is also used for two management tools, which should not be confused with the published DFC:The actual cash flow is the daily or monthly tracking of the money that actually came in and went out. It is a routine task, and its data feeds both the DFC and the projections.The projected cash flow is an estimate of future cash inflows and outflows, based on the company's history and its forecasts. In financial planning, it makes it possible to anticipate the business's cash needs and make decisions about investments, financing and other activities that could compromise the company's financial health.The projected flow usually covers a specific period (month, two months, quarter, half-year or year). It uses estimates of sales, costs, expenses and investments, and can also take into account foreseeable external factors, such as market changes, regulations, exchange rates, seasonality and supply problems.Both are important: the actual flow shows what happened and serves as the basis for estimates; the projected flow gives management the information it needs to decide, such as how much is available to invest and how much working capital will be needed. Decisions about where to cut costs and how to increase cash often come out of this analysis.History of the DFC in BrazilThe Statement of Cash Flows became mandatory in Brazil with Law 11,638/2007, which amended article 176 of Brazilian Corporate Law (Law 6,404/76) and put it in place of the former Statement of Sources and Uses of Funds (DOAR), starting with fiscal years 2008. Privately held corporations with equity below R$ 2 million at the balance sheet date are exempt from preparing it (art. 176, § 6). The same law extended the rules for preparing financial statements to large companies, even if they are not corporations (art. 3). According to Technical Pronouncement CPC 03, item 10, 'the statement of cash flows shall report cash flows during the period classified by operating, investing and financing activities'.Before it became mandatory, empirical studies show that many companies already published the DFC voluntarily, because it gives investors relevant information about the company's financial health.On this subject, the study by Salotti and Yamamoto (2008) stands out: it investigated the reasons for the voluntary disclosure of the DFC by listed companies on Bovespa (now B3). The study found, among other things, that these companies disclosed the DFC mainly because they gave more importance to the perceptions of external investors, had lower disclosure costs, and because disclosure reduces information asymmetry.How to build a projected cash flowIn simple steps, a projected cash flow can be built like this:Choose the period (month, quarter, year, etc.).Estimate the cash inflows for the period: receipts from cash and credit sales, redemptions of investments, loans to be received, contributions from partners, donations, whatever applies.Estimate the cash outflows: suppliers, salaries, raw materials, marketing, rent, taxes, loan installments, equipment purchases, dividends, etc.Calculate the net flow for the period: inflows − outflows. If you want to follow the DFC model, split it into operating, investing and financing.Assess which external factors may affect cash: market fluctuations, seasonality, interest rates, tax changes, shortages of labor or products, etc.Calculate the projected cash balance: opening balance + operating flow + investing flow + financing flow (each with its sign, positive or negative).Update the projections with actual data so that the estimates become increasingly accurate.A company starts the quarter with R$ 20,000 in cash. The projected operating flow is +R$ 15,000, the investing flow is −R$ 30,000 (purchase of a machine) and the financing flow is +R$ 5,000. What is the projected closing balance?Answer: R$ 10,000 — 20,000 + 15,000 − 30,000 + 5,000. Forgetting the investing flow gives R$ 40,000, but buying the machine also takes money out of the cash balance.What is the difference between the DRE and the DFC?The main difference between the two, the DRE (income statement) and the DFC (statement of cash flows), is the basis used to record events.The DRE follows the accrual basis: revenue is recorded when it is earned (for example, when the goods are delivered to the customer) and expenses when they are incurred, regardless of when the money will be paid or received. That is why it shows the profit or loss for the period.Difference between DRE and DFCThe DFC, on the other hand, follows the cash basis: it records the money coming in and going out on the date of payment or receipt, when the amount actually moves.An example makes the difference clear. In December, a store sells R$ 10,000 on credit, to be received in January; pays R$ 6,000 in cash for the goods it sold; has R$ 500 of depreciation on its furniture; and borrows R$ 5,000 from the bank.December eventDecember DREDecember DFCCredit saleRevenue of R$ 10,000Nothing (the money comes in January)Goods paid in cashCost of R$ 6,000Operating outflow of R$ 6,000DepreciationExpense of R$ 500Nothing (no money goes out)LoanNothing (it is not revenue)Financing inflow of R$ 5,000TotalProfit of R$ 3,500Cash decreases by R$ 1,000The company made a profit and still ended the month with less money than it started with. That is exactly what the two statements reveal when read together.In March, a company sells R$ 8,000 on credit, to be received in April, pays R$ 3,000 of March salaries and buys a R$ 10,000 machine in cash, with depreciation of R$ 100 for the month. What are March's profit and the change in cash for the month?Answer: Profit of R$ 4,900 and cash −R$ 13,000 — the DRE includes the sale, the salaries and only the month's depreciation: 8,000 − 3,000 − 100. In cash, the sale has not come in yet, but the salaries and the entire machine went out: −3,000 − 10,000.Which is more important: cash flow or the DRE?The two have different purposes and complement each other, but cash flow directly affects the company's operations. However good the profit margins are, the company cannot operate if it does not plan its cash well: it needs a minimum amount of money to buy what it needs for inventory and keep selling. A company can be profitable and still go bankrupt for lack of cash, as in the example above. That is why, day to day, cash flow deserves constant attention: if it is poorly managed, the company runs out of working capital and suffocates. The DRE, in turn, tells whether the business is worthwhile in the long run.Why can a company with a profit in the DRE run out of money to pay its bills?Answer: Because profit includes sales not yet received and excludes outflows such as machine purchases and loan repayments — the DRE follows the accrual basis, and cash follows the money. Depreciation is precisely the opposite: it reduces profit without taking money out of cash.What will we see from now on about cash flow?I intend to use these lessons so that we can read the cash flow in companies' earnings reports. Taesa, a company in the electricity sector, for example, publishes its report here, and I would like each student to be able to read and interpret what is happening in the company.
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