Cash flow refers to the actual inflow and outflow of cash of a company over a specific period. Unlike accounting profit, cash flow measures liquidity and shows whether a company is able, in the short term, to meet liabilities, make investments, or build reserves.
What is cash flow in practice and why is it important?
For freelancers and small businesses in Germany, cash flow is a central management tool in accounting. While profit is determined according to tax and accounting rules (e.g., EStG, HGB) and does not reflect all payment transactions at the same time, cash flow shows the actual movements of money.
Key relationships:
- Liquidity assurance: Cash flow indicates whether sufficient cash is available.
- Investment capacity: Only a positive cash flow enables free investment decisions without external financing.
- Financing decisions: Lenders and lessors regularly consider cash flow as an indicator of creditworthiness.
Types of cash flow and their significance
In practice, three areas are usually distinguished, which are also reported separately in the cash flow statement (cash flow report):
Operating cash flow
Records receipts and payments from ongoing business activities (e.g., receipts from customers, payments to suppliers, wages). It is the most important metric for short-term liquidity.
Investing cash flow
Includes payments for acquisitions or disposals of fixed assets (e.g., purchase of machinery, sale of a vehicle). Negative values are normal here for investments, but must be offset in the long term by positive operating cash flow.
Financing cash flow
Shows receipts and payments from financing activities (e.g., taking out or repaying loans, distributions, injections of equity).
Calculation, practical example and accounting specifics
For small businesses a simple cash flow view is often sufficient: total inflows minus total outflows in the period. For companies preparing financial statements, operating cash flow is frequently derived from net income by adding back non-cash expenses (e.g., depreciation) and adjusting for changes in receivables and payables.
Example of a freelancer's monthly cash flow:
| Item | Amount (€) |
|---|---|
| Receipts from customers | 8.000 |
| Expenses for materials and external services | -2.500 |
| Wage and salary payments | -1.800 |
| Operating expenses (rent, insurance) | -700 |
| Net cash flow | 3.000 |
Important: Tax payments and VAT have a strong impact on cash flow. The choice between accrual and cash accounting for VAT (cash accounting under the conditions of the VAT Act) directly affects the timing of tax payments and thus liquidity.
Depreciation is treated as an expense in profit determination but does not represent a cash outflow. Therefore it is often added back when calculating cash flow.
Practical tips to improve cash flow
Freelancers and small business owners can improve their liquidity position with simple measures:
- Issue invoices promptly and set clear payment terms; offer a discount for early payment.
- Maintain an efficient dunning process and monitor outstanding receivables; outsource receivables management if necessary via factoring.
- Agree on advance payments for larger orders to finance up-front work.
- Consider leasing instead of purchasing to avoid large initial cash outflows.
- Arrange credit lines with your main bank to bridge short-term shortages.
- Review VAT options (cash accounting) to stagger tax payments.
For accounting, a regular liquidity forecast (e.g., a 13-week plan) is recommended, which compares expected receipts and payments over time. This allows you to detect shortfalls early and take corrective action.
Conclusion: Cash flow is indispensable for the day-to-day management of your business in Germany. It complements the profit and loss statement and is the most important tool for securing solvency, planning investments and preparing for financing discussions.