The cash flow statement — in Brazil, the DFC (Demonstração dos Fluxos de Caixa) — differs from the other financial statements because it is prepared on a cash basis: it records money when it actually comes in or goes out. The other statements, such as the income statement (DRE, Demonstração do Resultado do Exercício), follow the accrual basis, which recognizes revenues and expenses when they are earned or incurred, regardless of payment. That is why a direct comparison between the DFC and the other statements calls for care: a company can make a profit and still run out of cash — and the opposite also happens.Ignoring the financial side of decisions can push a company to one of two extremes. In the first, it keeps financial resources idle, which represents a cost (the opportunity cost of money sitting still when it could be earning elsewhere). In the second, it comes to depend on emergency funding, which also generates financial costs that are often incompatible with the return generated by the business.Analyzing and monitoring cash flow information allows managers to act in the present so that these situations do not occur in the future and, consequently, to avoid these unnecessary costs. This is a high-value service that accounting provides to the company, because it gives managers the basis to plan their actions taking the financial side into account. Remember that management reports do not have to (and should not) be tied to the format required for external reporting: they can explore the full informational potential of accounting, free from the limits imposed by the standards, to meet the manager's specific needs in each circumstance.The use of cash flow in financial managementBesides supporting financial decisions (raising and investing funds), cash flow management also helps with the operational management of the company. All it takes is for the reports to show the relationship between cash and the other relevant accounts involved in the financial flow of the business.How cash affects the running of the companyWhen a manager adopts, for example, a certain purchasing policy, that choice affects cash through payments to suppliers, and the effect also shows up in the inventory account. When the manager adopts a collection strategy, it affects cash through receipts from customers, and the effect shows up in the accounts receivable balance. And so on.Looking at cash flow from this angle lets the manager answer questions such as: how much of the cash generated by my activities is already committed? How much more can I commit? What is the effect of an investment decision on my financial breathing room?Another focus of analysis is the relationship between cash and the sources of capital (liabilities and equity). Monitoring cash flow together with the balances of these accounts helps the manager assess alternatives for raising funds from third parties, the possibility of new capital contributions from the partners, or the availability of funds to distribute profits.A company made a profit of R$ 50 thousand in the month, but its cash balance fell. Which explanation is consistent with this?Answer: It sold a lot on credit and has not yet collected from customers — profit follows the accrual basis and counts the sale when it happens; the money only comes in when it is collected. Receiving before paying would have the opposite effect, increasing cash.The subdivisions of cash flowThere are several ways to present cash flow, but the most widely used — and perhaps the one that best shows how the organization's main decisions affect cash — classifies each movement into three groups: operating cash flow, investing cash flow and financing cash flow. It is also the model required by accounting standards for the published cash flow statement (in Brazil, CPC 03 (R2), the local pronouncement equivalent to IAS 7).The merit of this model is that it shows the user three groups of decisions that affect cash in different ways, with different volumes and frequencies. This helps managers themselves classify their decisions and see more clearly not only what kind of action they are taking, but also its effect on their financial "breathing room".Subdivisions of cash flowEach of these three groups of decisions is described below.Operating decisionsOperating decisions are, as a first approximation, those that affect accounts receivable from customers, inventories, suppliers and other operating payables — in other words, those that affect working capital.In more detail, they are the decisions managers make in the day-to-day running of the business, involving customers, suppliers and the production process. The financial result of all this shows up in cash, more precisely in the cash flow from operating activities. Analyzing how this flow behaves together with these accounts, period by period and in light of the decisions taken, lets managers understand the financial effects of their operating actions and strategies. Frequent monitoring helps them review the policies and decisions that are eroding their financial breathing room and correct course before more complicated situations arise.Creditors, when deciding whether or not to grant credit, always check whether the operation can generate enough cash to repay the principal and the interest.Typical questions this analysis answers: how can I optimize the cash generated by my operations? What is the financial effect of a more aggressive sales policy (for example, with longer payment terms for customers)? What is the financial effect of a given purchasing policy?Operating cycleLook at the figure above: what could you do to influence the operating cycle? Remember that the operating cycle runs from the purchase of goods (or raw materials) to the receipt of the sale, that is, the average inventory period + the average collection period. Subtracting the average payment period to suppliers gives the cash conversion cycle (in Brazil, ciclo financeiro), which is the period the company has to finance with its own or third-party funds. Reducing inventories, shortening the collection period or obtaining longer terms from suppliers reduces this need.Investing decisionsInvesting decisions relate to long-term assets such as facilities, machinery, equipment and vehicles (property, plant and equipment), as well as intangible assets and stakes in other companies. They therefore involve strategies about installed capacity, modernization of the structure and innovation — decisions with medium- and long-term effects.This analysis helps managers answer questions such as: what have been the financial effects of the strategies for expanding capacity, technological innovation or expanding the area of operation? How much of the cash generated by operations is committed to investments, and to what kind of investment?Managers expect investment in long-term assets to increase profit and, consequently, cash flow: modernization can reduce production costs, and expanding capacity allows the company to sell and earn more. What managers often fail to see is when that effect will happen. It is not unusual for these investments to tie up cash in the short term, well before the return arrives. If the company does not have enough "breathing room" in that interval, it can run into financial difficulties.Financing decisionsFinancing decisions deal with the sources of funds, both for operations and for investments, and involve two groups of balance sheet accounts: financing liabilities (third-party capital or interest-bearing liabilities) and equity (own capital).Financing liabilities mainly means debts taken on with banks and, where applicable, with investors through the issue of securities (such as debentures), as well as other alternative sources such as factoring companies. Examples: loans, financing, secured credit lines, overdrafts, revolving credit card balances, and discounting of trade bills or other credit instruments.This analysis helps managers reflect on questions such as: how much of my operating cash flow is committed to paying third parties? How much of the profit can I distribute to the partners without putting the company at risk?There are several aspects to consider when choosing between sources of capital. When taking out a loan, for example, managers commonly focus heavily on the interest rate, which will weigh on profit, and pay little attention to the term of the operation. But it is the term that sets the size of the repayment installments that will tie up cash in the following periods. A cheap loan with too short a term can lead the company into a critical financial situation.A store keeps goods in inventory for 40 days, collects from customers in 30 days and pays suppliers in 25 days. What is the cash conversion cycle?Answer: 45 days — the operating cycle is 40 + 30 = 70 days; subtracting the suppliers' 25-day term leaves 45 days that the store has to finance. 70 days is the operating cycle, not the cash conversion cycle.A company replaces a 12-month loan with a 48-month loan at the same interest rate and for the same amount. What is the main effect on monthly cash?Answer: Monthly principal repayments become smaller, easing cash each month — the principal is spread over more months. On the other hand, total interest paid over the contract increases, because the debt stays outstanding longer.In which group of the cash flow statement does a cash payment for a new factory machine go?Answer: Investing activities — buying property, plant and equipment is an investment decision with medium- and long-term effects. If the seller financed the machine, the installments paid later would be classified as financing.Exercises1) (CESPE / CEBRASPE - 2022 - ANP - Regulator of New Attributions II - Position 5) A company wants to measure the economic feasibility of a project for a new production plant. Considering this hypothetical situation, judge the following item.The project will be considered feasible if the sum of the project's future cash flows is sufficient to cover the initial investment.A) TrueB) False2) (IF-MS - 2019 - IF-MS - Technologist in Financial Management) Financial planning serves as a guide for the organization's activities, with the aim of achieving its short- and long-term objectives. Financial planning involves the cash budget and the projection of the financial statements. For what purpose does the financial manager prepare the cash budget?A) To know the company's operating needs and arrange long-term funding.B) To know the company's financial needs and arrange short- and long-term funding.C) To know the cash deficits and arrange short-term funding.D) To use it as a basis for developing the financial statements.E) To determine cash surpluses for long-term investment.3) (IF-MS - 2019 - IF-MS - Technologist in Financial Management) In a feasibility analysis, we consider the operating cash flows that will be generated by the proposed project. Why are operating cash flows considered in the feasibility analysis of proposed investment projects?A) Because they measure the cash inflows generated by the project.B) Because they are financial data and therefore actual.C) Because they are accounting data.D) Because they show the additional profit to be obtained by implementing the proposal.E) Because they are relevant data.4) (CS-UFG - 2018 - SANEAGO - GO - Sanitation Analyst - Accountant) A certain trading company has the following indicators: average inventory renewal period: 80 days; average sales renewal period: 90 days; average payment period for purchases: 100 days. Based on these indicators, what is the company's operating cycle, in days?A) 100B) 170C) 180D) 1905) (CFC - 2015 - CFC - Bachelor of Accounting - 1st Exam) A manufacturer buys raw materials on credit. After receiving the raw material, it stores it, on average, for 7 (seven) days before sending it to the production area, where it remains in process for 4 (four) days. After manufacturing is completed, the company keeps the finished product in stock for an average of 21 days before selling it. Sales are made with an average collection period of 35 days. The supplier is paid 17 days after the purchase of the raw material.Regarding the situation above, the Cash Conversion Cycle is:A) 17 days.B) 29 days.C) 50 days.D) 56 days.6) (CETAP - 2011 - Belém City Hall - PA - Administrative Assistant) The information provided in the cash flow statement, if used with the related disclosures and information in the other financial statements, will help investors, creditors and others to assess: I- the ability of the business to generate net cash flows; II- the ability of the enterprise to pay dividends and financing; III- the reasons for the differences between cash flow and net income. Which is (are) CORRECT:A) only item I.B) only items I and II.C) only items II and III.D) only items I and III.E) items I, II and III.7) (FUNDATEC - 2023 - IF-SC - Accountant) Regarding the transactions recorded in a public sector entity during a certain period of the 2021 fiscal year, presented below, the transactions that should be recognized in the Cash Flow Statement as investing activities are:I. Cash receipts from claims and other policy benefits, and cash payments of premiums and annuities, in transactions with an insurer.II. Cash receipts from taxes, fees, contributions and fines.III. Cash receipts from the sale of property, plant and equipment, intangible assets and other long-term assets.IV. Repayment of loans and financing taken out.Which are correct?A) Only I.B) Only III.C) Only I and II.D) Only III and IV.E) I, II, III and IV.8) (IBADE - 2023 - Rio Branco City Hall - AC - Accountant) Judge the sentences below as TRUE or FALSE.(__) The interpretation of the results of the cash flow statement is essential for the development of social and financial policies, investment planning and financial risk management.(__) Financing activities involve loans, fundraising and the acquisition of non-current assets.(__) The Cash Flow Statement is made up of three main categories: management activities, advisory activities and planning activities.The CORRECT sequence is:A) T, F, T.B) F, T, T.C) T, T, T.D) T, T, F.E) T, F, F.9) (FUNDATEC - 2023 - Espumoso City Hall - RS - Accountant) Based on the Public Sector Accounting Standard that governs the Cash Flow Statement, it can be concluded that "the acquisition of assets through an exchange of assets, through the direct assumption of the related liability or through a finance lease; and the conversion of debt with third parties into equity" are examples of:A) Cash flows on a net basis.B) Transactions that do not involve cash or cash equivalents.C) Cash flows from operating activities.D) Cash flows from financing activities.E) Cash flows from investing activities.10) (Avança SP - 2023 - São Lourenço da Serra City Hall - SP - Treasurer) In the Public Sector Cash Flow Statement, amounts collected from the sale of real estate belonging to the Public Administration will be classified as:A) Investing Activity Flows.B) Capital Activity Flows.C) Operating Activity Flows.D) Financing Activity Flows.E) Extraordinary Activity Flows.Answers1) B — adding up future cash flows without discounting them ignores the time value of money; feasibility is measured in present value terms (NPV greater than or equal to zero).2) C — the cash budget shows the expected cash deficits (and surpluses), so that the company can arrange short-term financing.3) B — what matters in a project is the money that actually comes in and goes out, not accounting profit.4) B — operating cycle = inventory period + collection period = 80 + 90 = 170 days (the payment period only enters the cash conversion cycle: 170 − 100 = 70 days).5) C — operating cycle = 7 + 4 + 21 + 35 = 67 days; cash conversion cycle = 67 − 17 = 50 days.6) E — all three objectives are listed in the standard (CPC 03 / IAS 7).7) B — I and II are operating activities and IV is a financing activity; only the sale of property, plant and equipment (III) is investing.8) E — the second is false because acquiring non-current assets is an investing activity; the third is false because the three activities are operating, investing and financing.9) B — these are non-cash transactions and are left out of the cash flow statement (they are only disclosed in the notes).10) A — the sale of assets is an investing activity.
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