Cash Flow Analysis

What Is Cash Flow?

Cash flow is the net movement of cash and cash equivalents into and out of a business during a defined period. Unlike accounting profit — which follows the accrual principle and includes non-cash income and expense items — cash flow reflects the actual liquidity the business generates or consumes.

The fundamental distinction is:

• Profit answers the question: “Did the business create value?”
• Cash flow answers the question: “Did the business generate cash it can use?”

A profitable business can run out of cash (overtrading, slow collections, heavy investment). A loss-making business can generate positive cash flow (by reducing working capital or selling assets). Understanding the difference is essential for business owners, investors, and lenders.

The Cash Flow Statement (Estado de Flujos de Efectivo)

Under Spanish GAAP (Plan General Contable), the cash flow statement (estado de flujos de efectivo) is a mandatory component of the annual accounts for companies that do not qualify for the abbreviated format (broadly: companies exceeding two of three thresholds: 4 million euros total assets, 8 million euros net turnover, or 50 employees for two consecutive years).

The statement is divided into three sections:

1. Operating Cash Flows (Flujos de las Actividades de Explotación)

Cash generated from the core business operations:

• Cash received from customers
• Cash paid to suppliers
• Cash paid to employees (salaries, Social Security)
• Corporate tax payments
• Interest received and paid (where classified as operating)

This is the most important section: it shows whether the business’s core activity generates or consumes cash.

2. Investing Cash Flows (Flujos de las Actividades de Inversión)

Cash used for or generated by investment activities:

• Purchase or disposal of fixed assets (property, plant, equipment)
• Acquisitions or disposals of subsidiaries and investments
• Cash from or to financial investments

3. Financing Cash Flows (Flujos de las Actividades de Financiación)

Cash flows from the company’s financing structure:

• Proceeds from new equity issues or capital increases
• Dividends paid to shareholders
• New borrowings and loan repayments
• Lease liability payments (under IFRS 16 / Spanish GAAP equivalent)

Key Cash Flow Metrics

Operating Cash Flow (OCF)

Net cash generated from operations before investing and financing activities. The starting point for assessing whether the business is self-financing.

Free Cash Flow (FCF)

Free Cash Flow = Operating Cash Flow – Capital Expenditure (Capex)

FCF represents the cash available to pay dividends, repay debt, or fund acquisitions after maintaining and growing the business’s asset base. It is the primary metric used in DCF (discounted cash flow) valuations.

Cash Conversion Ratio

Cash Conversion = Operating Cash Flow / EBITDA (or Operating Profit)

Measures how efficiently accounting profit converts to actual cash. A ratio below 1.0 indicates that cash is being consumed by working capital build or is being trapped in non-cash accounting items.

Free Cash Flow Yield

For investment analysis: FCF divided by enterprise value or equity market capitalisation. Used to compare the cash-generating attractiveness of different investments.

Why EBITDA Is Not Cash Flow

EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortisation) is often used as a proxy for cash flow, but the two are not the same. EBITDA ignores:

• Changes in working capital: A business growing quickly typically consumes significant cash building receivables and inventory, even if EBITDA is rising.
• Capital expenditure: EBITDA adds back depreciation, but the capex that underlies depreciation is a real cash outflow.
• Tax payments: EBITDA ignores Corporate Tax, which is a real cash cost.
• Interest payments: EBITDA ignores interest payments on debt.

For this reason, investors and analysts use FCF (or variants like Unlevered Free Cash Flow for enterprise valuation) alongside EBITDA rather than relying on EBITDA alone.

Cash Flow in Spanish M&A

In the context of Spanish M&A transactions:

Discounted Cash Flow (DCF) Valuation

A DCF model projects the free cash flow the business is expected to generate over a forecast period (typically 5 to 10 years), then discounts those flows back to a present value using the Weighted Average Cost of Capital (WACC). A terminal value (representing the business’s value beyond the forecast period) is added. The result is the Enterprise Value (EV).

DCF is particularly useful for businesses with strong, predictable cash flows (infrastructure, recurring revenue SaaS, utilities). It is less reliable for early-stage businesses or companies in cyclical industries where long-term projections are uncertain.

Cash Flow vs EBITDA Multiples

While EBITDA multiples are the most common quick valuation tool in Spanish M&A, professional buyers validate valuations through DCF analysis and cash flow modelling. The difference between EBITDA-implied value and DCF value can be significant when the business has high capex requirements, working capital inefficiencies, or a heavy debt service burden.

Cash Flow Management for Spanish Businesses

Working Capital Optimisation

The primary driver of operating cash flow variability is working capital management:

• Debtor collection: Spanish commercial practice involves long payment terms (60–90 days is common; some industries see 120+ days). The Law 15/2010 on late payment caps commercial payment terms at 60 days for private transactions and 30 days for public-sector contracts, though enforcement is inconsistent.
• Supplier terms: Extending supplier payment terms improves cash flow but must be managed carefully to preserve relationships.
• Inventory: Excess inventory ties up cash; lean inventory management releases it.

Cash Flow Forecasting

A 13-week rolling cash flow forecast is the standard tool for short-term liquidity management. It projects expected inflows and outflows week by week, identifying potential shortfalls before they become crises. In distressed situations, banks and restructuring advisors require detailed cash flow forecasts.

Frequently Asked Questions

Can a company be profitable but cash-flow negative? Yes. This happens in fast-growing businesses (more receivables and inventory as sales increase), capital-intensive businesses (heavy investment in assets), or businesses with seasonal cash flow patterns. Managing this divergence between profit and cash is one of the key financial management challenges.

What is “cash trap” in a Spanish group? Where a subsidiary generates cash but cannot distribute it to the parent (due to legal restrictions, tax costs, or minority shareholders blocking dividends), the cash is said to be “trapped.” This is a frequent issue in Spanish holding structures where subsidiaries have minority shareholders.

How does factoring affect cash flow? Factoring (selling receivables to a bank at a discount) accelerates cash collection, converting long payment terms into immediate cash. It is widely used by Spanish SMEs and improves operating cash flow at the cost of the factoring discount (typically 1–3% per annum equivalent).

Is the cash flow statement required for all Spanish companies? No. Companies preparing abbreviated annual accounts (below the size thresholds) are not required to prepare a cash flow statement. However, lenders and investors typically request one as part of their credit or due diligence process.

What is normalised free cash flow? In M&A, normalised FCF adjusts historical free cash flow for one-off, non-recurring, or non-arms-length items to better represent the underlying cash-generating capacity of the business. It mirrors the concept of adjusted EBITDA but takes the analysis further to include capex, tax, and working capital normalisations.

How BMC Can Help

Our corporate finance team prepares cash flow models, 13-week forecasting tools, and DCF valuations for M&A transactions, financing processes, and business planning. We help clients understand the drivers of cash conversion in their business and implement improvements.