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Business Cash Flow Analysis: What it is and How to do it

Jan 7, 2019

Cash flow is the pulse of every business and monitoring it at least once a month is crucial. Cash flow analysis is a cycle of your business cash inflows and outflows, with the objective of maintaining adequate capital for your business and to provide the basis for financial management.

One of the most common problems faced by small business owners is running short of capital. That is why performing a cash flow analysis regularly is essential to help you avoid this pitfall, and also manage your business more effectively.

What is business cash flow analysis?

A cash flow statement analysis deep dives into your business financial health and inspects it throughout the month (or say a given time period). The cash flow statement shows how a company spends its money and where the money comes from. It also includes all the cash inflows a company receives from its ongoing operations, and external investment sources, in addition to cash outflows for business activities and investments during a given quarter.

Let’s dig a little deeper into how to decorously perform cash flow analysis in order to make more informed decisions on the various activities for your small business.

Before focusing on ‘How to’ let’s understand ‘Why?’

Why is business cash flow statement crucial?

Creating a cash flow statement is a great first step but if you don’t know to analyze it or read it then it’s not credibly useful. If your cash flow analysis shows that you’re running short of cash to meet expenses, you can plan ways to cut costs, obtain short term financing, or take measurable steps to accelerate your income. If your cash flow shows you have extra profit on hand then consider to either invest it or save for future slow periods.

Even though you have a lot of cash on hand it doesn’t necessarily mean your business is profitable that’s determined by your profit margins. On the contrary, a business with smaller profit margins can get into trouble if they don’t have enough to handle the expenses or to pay the bills. A business that has a lot of debt at one point of time can still be financially strong as long as the owner knows that the projected cash flow can be relied on to cover the debts.

How to prepare a business cash flow statement analysis:

1) Create a cash flow statement by entering your company’s total cash balance at the beginning of the month into your spreadsheet. If you have done a cash flow statement before, take the end balance from the last cash flow statement.

2) Divide cash inflows and outflows into three categories – operating, investment  and financing activities.

  • Operating activities: Operating cash flow is indicative of your business efficiency and health. Operating inflows include money received from sales or paid receivables. Operating outflows include money paid to suppliers, employee, financing, payroll or any taxes not related to investing and depreciation or amortization of business assets. Therefore, the total operating cash flow is calculated by subtracting the cash outflows directly related to your business operations from the cash inflows directly gained through your business operations. When you run a statement of cash flows, your aggregate operating cash flow will be expressed under “net cash flow for operating activities.” This amount shows what you’ve made (or lost) on basic business operations.
  • Investment activities: The cash inflow of investment activities includes the purchase of new fixed assets (items owned by your business for long-term use) and cash gained from selling fixed assets, such as business equipment, real estate, securities, etc. Your total cash flow of investment activities is calculated by subtracting your investment cash outflows from your investment cash inflows. You can use the cash flow of investment activities to analyze the state of your company’s fixed assets. Lenders and investors use this cash flow ratio to examine whether it’s worth investing in your business or not.
  • Financing activities: The cash flow of financial activities is used to see how much cash you have spent and received from additional financing and raising capital. It includes issuing stock to shareholders, buying it back, making payments on a business loan or distributing dividends. For example, if you take a loan for your business, the loan would be recorded as an inflow and each payment you make on the loan would be recorded as outflow. Your total cash flow of financial activities is calculated by subtracting the financing cash outflows from the cash inflows raised from financing. It is important for analyzing whether your business has the cash to pay off its debt or to take on new debt.

After recording all of the relevant transactions on your cash flow statement, add everything up to arrive at a closing balance. The cash flow is positive if your closing balance is higher than your opening balance. On analyzing your business finances, you may determine that you need a working capital loan or a line of credit to help you maintain positive cash flow.

Cash flow analysis empowers you to take the necessary steps to maintain a sustainable operation. It gives you a clear picture of how much cash is actually generated by core operations, a better sense of your financing needs, and a snapshot of the potential growth of your small business. The more frequently you do cash flow analysis, the more you learn and you will begin to see patterns.


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