Do I have to prepare a cash flow statement?

The short answer

Not if you are micro or small — they are exempt. Medium-sized and large entities do include a cash flow statement in their Dutch annual accounts.

Basis: RJ 360

When does a cash flow statement belong in the annual accounts?

The cash flow statement shows where the money came from and where it went, split into operating, investing and financing activities (RJ 360).

For medium-sized and large legal entities, the duty follows from the applicable reporting framework, with RJ 360 as the key guideline. Small and micro legal entities are exempt from this presentation. Do check whether your lender, grant provider or group reporting asks for a statement. A voluntary statement can be useful internally, provided it is prepared carefully and ties in with the balance sheet. Distinguish between the statutory annual accounts and a simple liquidity forecast: a forecast for next year is not a statement of actual cash flows in the past financial year.

How do you build up the three cash flows?

Small and micro legal entities are exempt from this presentation. If a lender still asks for a cash flow statement, make clear which method and period you use and ensure the statement ties in with the annual accounts.

The operating cash flow comes from ordinary business activities. Investments, such as buying a machine for € 40,000, go in a separate category; receiving a new loan of € 25,000 belongs to financing. For example, start with € 10,000 of cash and cash equivalents, add € 30,000 of operating inflow and € 25,000 of new financing, deduct € 40,000 of investment and end at € 25,000. Check that this € 25,000 matches the closing balance sheet, taking into account the definition of cash and cash equivalents used.

Why does cash flow differ from profit?

The closing figure must tie in exactly with the movement in cash and cash equivalents between the opening and closing balance sheet. If it does not, there is an error in the derivation, not in the balance sheet.

Profit and cash flow differ because income and expenses are not always paid immediately. A sale of € 12,000 on credit increases turnover, while the bank stays the same. Depreciation of € 5,000 lowers the result without any payment in that year. That is why changes in receivables, payables and inventories are needed to explain an indirect operating cash flow. Do not include the same cash movement twice when an investment is financed through a loan. Record the reconciliation to the ledger accounts so that the accountant or reader can recalculate the amounts.

How do you check the reconciliation with cash and cash equivalents?

Start with cash and cash equivalents at the previous balance sheet date and end at the current balance sheet date. Suppose the bank showed € 32,000 last year and now € 47,000; the net cash flow must then explain € 15,000, taking into account the chosen definition of cash. Go through the bank book for large movements: loan received, investment paid and customer payments received. An internal transfer between two own bank accounts is, on balance, not a new cash flow. Also check exchange differences on foreign bank accounts, because they can otherwise make the reconciliation look off.

Use the statement to ask questions that the profit and loss account does not answer. Why does profit rise while the bank balance falls? Have receivables started paying later, has inventory been built up or has debt been repaid? A BV can report € 80,000 of profit and still have invested € 100,000 in a machine. That need not be a contradiction. Record for each cash flow which ledger accounts and adjustments were used, so the statement can be repeated at the next close. A lender can place more trust in that reconciliation than in a stand-alone 'cash flow' figure without a definition.

Sources

• KVK: annual accounts per size class
• RJ: Guidelines for annual reporting (Richtlijnen voor de jaarverslaggeving)

Read more