Cash flow statement in Finland – what does it tell you about a company's cash?
Profit is not the same as cash flow. A cash flow statement shows where cash comes from and where it goes through operating, investing and financing activities.
A profitable company can still run into a cash crisis. The income statement shows the result for the financial year and the balance sheet shows the financial position, but only the cash flow statement shows where cash has come from and where it has gone.
What is a cash flow statement?
A cash flow statement describes the change in a company's cash and cash equivalents during the financial year. It complements the income statement and balance sheet by answering the question: how much cash did the business actually generate, and how was it used for investment and financing?
Three cash flows
Under Chapter 2, section 1 of the Finnish Accounting Decree, the statutory cash flow statement is divided into three parts:
- Cash flow from operating activities – cash received from sales and paid for expenses.
- Cash flow from investing activities – for example, purchases and sales of machinery, property or businesses.
- Cash flow from financing activities – loan drawdowns and repayments, dividends and equity investments.
Why can profit and cash flow differ?
- Trade receivables: sales are recognised as income even though the customer pays later.
- Trade payables: expenses are recognised even though the invoice is paid later.
- Inventories: goods bought for stock tie up cash before they appear as an expense.
- Depreciation: reduces profit but is not cash leaving the business.
- Investments: take cash immediately but appear in the income statement only as depreciation over several years.
- Loans: a drawdown brings in cash and a repayment takes it out, but neither is profit.
Example: a profitable year, but cash falls
An illustrative example of a fictitious SME (EUR thousand):
| Item | Effect |
|---|---|
| Profit for the financial year | +150 |
| Depreciation (non-cash) | +40 |
| Increase in trade receivables | −120 |
| Increase in inventories | −60 |
| Increase in trade payables | +30 |
| Cash flow from operating activities | +40 |
| Machinery investment | −100 |
| Cash flow from investing activities | −100 |
| New bank loan | +80 |
| Loan repayments | −30 |
| Cash flow from financing activities | +50 |
| Change in cash | −10 |
Although the company made a profit of EUR 150,000, its cash fell by EUR 10,000. Growth tied up cash in receivables and inventories, and the investment was financed partly with a loan.
Who must prepare a cash flow statement in Finland?
Under Chapter 3, section 1 of the Finnish Accounting Act, a cash flow statement is a mandatory part of the financial statements only for large undertakings and public-interest entities (PIEs). For most SMEs, a statutory cash flow statement is therefore not mandatory.
According to guidance from the Finnish Patent and Registration Office (PRH), a company is a large undertaking when at least two of the following thresholds are exceeded in both the financial year just ended and the immediately preceding financial year:
- balance sheet total EUR 25 million,
- turnover EUR 50 million,
- an average of 250 employees.
Why should an SME monitor cash flow even if a cash flow statement is not mandatory?
- Liquidity: cash flow shows early on whether there will be enough money for salaries, taxes and invoices.
- Debt service capacity: lenders assess whether operating cash flow covers loan interest and repayments.
- Investment planning: investments should be sized according to what the business generates in cash.
- Valuation and M&A: ultimately, a buyer pays for future cash flows.
- Financing negotiations: a cash flow forecast strengthens your negotiating position.
The cash flow statement in M&A and valuation
In a company valuation, EBITDA or profit alone does not show how much a company generates for its owners. Changes in working capital and investment needs affect how much cash is freely available. Two companies with the same EBITDA can be worth very different amounts if one continually ties up cash in inventories and investments.
In an M&A transaction, cash flow analysis helps assess the purchase price, the normal level of working capital and the financing of the deal. See also a practical example of how a company is valued.
Checklist for management
- Do you monitor cash flow monthly, not just profit?
- Do you know how much cash is tied up in receivables and inventories?
- Is there an investment plan that includes the cash flow impact?
- Does operating cash flow cover loan repayments?
- Do you have a cash flow forecast covering at least 12 months?
Do you need cash flow analysis for a valuation or transaction?
JTT prepares financial analyses, cash flow calculations and valuations to support M&A transactions and other corporate transactions. For audit clients, engagements are assessed in accordance with independence requirements. Contact us.
