Cash Flow Statement

What is a cash flow statement?

Cash flow statement (German: Kapitalflussrechnung) refers to a statement that explains how a company's liquid funds, that is, bank balances and cash, changed within a period. Also in use are the term cash flow calculation (Cashflow-Rechnung) and the English statement of cash flows. It assigns every payment in and out to one of three areas. Operating activities comprise the day-to-day business, investing activities the purchase and sale of assets, financing activities the money from and to shareholders and lenders. At the end, the result is reconciled with the stock of cash at the beginning and at the end of the period.

It resembles a bank statement whose entries are sorted into three groups. The first shows what the business brought in or cost, the second acquisitions and sales, the third the money from and to financiers.

Alongside the balance sheet and the income statement, it is the third component of financial reporting. The balance sheet shows assets and capital at a reporting date, the income statement the expenses and income of a period. Its main purpose is to show where liquidity came from and what it was used for, that is, whether a company earns its money itself or receives it from financiers. In transactions, it belongs in the information memorandum, the detailed company description for prospective buyers or investors, and in the data room with the review documents.

Cash flow statement under the HGB and IFRS: obligation and standards

A statutory obligation under the German Commercial Code (Handelsgesetzbuch, HGB) exists in two cases. The first is the consolidated financial statements, the combined financial statements of a parent company with its subsidiaries. Under Section 297(1) HGB, they always include, in addition to the consolidated balance sheet, consolidated income statement and consolidated notes, a cash flow statement and a statement of changes in equity (Eigenkapitalspiegel), an overview of the change in equity. The second concerns capital-market-oriented capital companies. These are companies whose shares or bonds are admitted to an organised market such as the regulated market of a stock exchange or for which admission has been applied for (Section 264d HGB). If they are not required to prepare consolidated financial statements, they must, under Section 264(1) sentence 2 HGB, extend their annual financial statement by both components.

For other GmbHs (German limited liability companies), the cash flow statement is voluntary. Many companies nevertheless prepare it because banks, investors or buyers require it. Content and layout follow German Accounting Standard No. 21 (Deutscher Rechnungslegungs Standard Nr. 21, DRS 21), which the Federal Ministry of Justice has published. For consolidated financial statements, compliance with it gives rise to the presumption that the generally recognised accounting rules (principles of proper accounting) have been observed. For capital-market-oriented companies under Section 264(1) sentence 2 HGB and for voluntary cash flow statements, DRS 21 itself recommends its application. Groups that account under the International Financial Reporting Standards (IFRS) according to Section 315e HGB apply IAS 7 instead.

Structure and scheme under DRS 21: three areas and the cash fund

Operating activities

The first area records the payments from the core business. DRS 21 permits here either the direct presentation of payments or the indirect derivation from the result for the period; in practice, the indirect method predominates. Investing and financing activities are always presented directly. The calculation scheme, influencing factors and the comparison with EBITDA are described in the entry on operating cash flow.

Investing activities

This area contains the payments for property, plant and equipment, intangible assets such as software or licences and financial assets, and the receipts from their disposal. Under DRS 21, interest and dividends received in principle also belong here. In a group, payments for the acquisition and from the sale of subsidiaries are added. The area shows how much a company invests in its future capacity and whether investments exceed depreciation, that is, whether the fixed assets grow.

Financing activities

This area contains the payments between the company and its capital providers. These include receipts from capital increases and other additional payments by shareholders, payments to shareholders such as profit distributions, and the taking up and repayment of loans. DRS 21 in principle also assigns interest paid to this area. Older HGB financial statements and IFRS financial statements for financial years before 2027 partly show it in the operating area, which should be borne in mind in comparisons.

The cash fund

The sum of the three areas gives the cash-effective change in the cash fund (Finanzmittelfonds). It comprises cash and cash equivalents, that is, cash on hand, bank balances and short-term investments that can be converted into cash at any time without significant risk of change in value. Such investments may have a remaining term of at most three months on acquisition. Bank liabilities due at any time that form part of the ongoing management of liquid funds are included and shown openly as a deduction. The composition must be disclosed and must be reconcilable with the balance sheet. In a group, changes from exchange rates and from the addition or disposal of subsidiaries are added.

Formula: cash fund at end of period = cash fund at start of period + cash flow from operating activities + cash flow from investing activities + cash flow from financing activities

Analysis of the cash flow statement by investors and banks

From the combination of signs, a company's financing pattern can be read:

• Operating negative, investing negative, financing positive: typical for a growth company whose build-up is carried by funding rounds or loans.
• Operating positive, investing negative, financing negative: a mature company that pays for investments from its own resources and in addition repays loans or makes distributions.
• Operating negative, investing positive: a company that sells assets to finance its ongoing business; in analysis, a warning signal.

At the same time, comparing the result for the period with the operating area makes the quality of earnings visible. If the two diverge over several years, for example because receivables grow faster than revenue or income does not lead to payments, that is a point for review. Investors and buyers then examine revenue recognition particularly closely, that is, the point in time at which revenue is booked. Banks base their assessment of debt service capacity on the cash flow statement, that is, the question whether interest and repayment can be paid from ongoing business.

Planned cash flow statement in integrated financial planning

In integrated financial planning, which links results, balance sheet and liquidity arithmetically, the cash flow statement is derived from the planned income statement and planned balance sheet. The planned cash flow statement shows in which month liquid funds would fall below a minimum reserve and thus when and in what amount external capital is needed.

For a funding round, this is the basis of the round size. Investors check whether the planning is arithmetically closed, that is, whether the planned closing balance agrees with the bank balance in the planned balance sheet, and whether the assumptions on payment terms and investments fit the past.

Worked example: cash flow statement under the indirect method

A technology company prepares a cash flow statement under DRS 21 for the financial year (amounts in EUR thousand). The cash fund consists only of bank balances and amounted to 1,200 at the start of the year.

• Operating activities: net loss for the year minus 900, plus depreciation 250, plus increase in provisions 100, minus increase in trade receivables 200, plus increase in trade payables 50 = minus 700
• Investing activities: payments for property, plant and equipment minus 300, payments for acquired software licences minus 100, receipt from the sale of a vehicle at book value plus 20 = minus 380
• Financing activities: receipts from a capital increase including additional payments into the capital reserve plus 2,500, receipt from a promotional loan paid out in December plus 500 = plus 3,000
• Cash-effective change in the cash fund: minus 700 minus 380 plus 3,000 = plus 1,920
• Cash fund at year end: 1,200 plus 1,920 = 3,120, matching the bank balance in the balance sheet

Operations and investments together used up 1,080, around 90 per month. Without the capital increase and the promotional loan, the balance would have fallen to 120, and without the capital increase alone to 620. This actual funding requirement could not be read from the net loss of 900. In the following years, the promotional loan must be serviced with interest and, where applicable after repayment-free start-up years, repaid; interest and repayment then appear as payments in financing activities.

Distinction: cash flow statement, income statement and liquidity planning

• Liquidity planning: forward-looking, usually direct planning of payments in and out for the coming weeks and months. It complements the planned cash flow statement but does not replace it; the cash flow statement itself is backward-looking or derived from integrated planning.
• Income statement: records expenses and income on the principle of accrual-based determination of results, irrespective of the timing of payment.
• Movement balance sheet (Bewegungsbilanz): an older form of sources and uses of funds statement that sets the changes in the balances of two balance sheets against each other, without being based on payments.
• Free cash flow: a key figure derived from the cash flow statement, operating cash flow less investments.

Common mistakes

• No reconciliation with the balance sheet. If the closing balance of the cash fund deviates from the bank balance, the statement is incomplete or wrong.
• Non-cash transactions shown as payments. The conversion of a loan into equity or a contribution in kind changes the balance sheet, not the cash fund, and does not belong in financing activities.
• Overdraft assigned wrongly. An overdraft facility, the credit line on the business account, belongs as a deduction in the cash fund if it serves the ongoing management of liquid funds. If it is recorded in financing activities or treated differently from year to year, the periods are not comparable.
• Plan without a closed loop. A planned cash flow statement that does not follow from the planned balance sheet and planned income statement loses its control function.

Frequently asked questions

Must a GmbH prepare a cash flow statement?

As a rule, no. It is mandatory in consolidated financial statements and for capital-market-oriented capital companies not required to prepare consolidated financial statements. Banks and investors can, however, require it by contract, for example through information obligations in a loan or participation agreement.

What is the difference between a cash flow statement under the HGB and under IFRS?

Mainly obligation and standard. Under the HGB, DRS 21 applies, and the statement is required only in consolidated financial statements and for capital-market-oriented companies; under IFRS, it forms part of every set of financial statements in accordance with IAS 7. For financial years before 2027, IFRS preparers may also show interest and dividends in the operating area. From 2027, IAS 7 as amended by IFRS 18, endorsed by the EU in February 2026, requires the same classification as DRS 21 for most companies.

Can a cash flow statement be prepared retrospectively?

Yes. The starting point is the opening and closing balance sheets of the year, the income statement and the schedule of fixed assets. For a clean classification, information from bookkeeping on additions to fixed assets, capital measures and loan movements is also needed.

Is the cash flow statement audited?

If it is part of financial statements subject to audit, yes. In consolidated financial statements and for capital-market-oriented companies, the audit extends to it. A statement prepared voluntarily is audited only if the audit engagement expressly covers it.

What do investors look at first in the cash flow statement?

The operating area, because it shows whether the business model generates liquidity from its own resources. Next comes the question whether the investments fit the growth and how dependent the company is on new financing.

The Roemer Capital view

In every financial model that we prepare for a funding round, the planned cash flow statement is the touchstone. It must follow from the planned income statement and planned balance sheet and reconcile to the bank balance in the base, cautious and optimistic cases. From it, we derive what round size a company needs to reach its next milestones with a sufficient reserve.

For the data room, we prepare the cash flow statements of past years, even if the company has not previously prepared them, and reconcile them with the annual financial statements of the tax adviser. Investors thus receive a continuous line from the actual figures into the planning.