How to Do a Cash Flow Analysis


Cash flow is a crucial measurement of your company’s financial health. Without a healthy cash flow, you may struggle to pay your vendors and staff. Knowing how to do a cash flow analysis can help you avoid these financial pitfalls. This guide can walk you through the steps and the benefits of this calculation.

Cash Flow Basics

Cash flow is different than sales revenue, as it looks at the actual money coming in and out of your business. A sale doesn’t increase cash flow until you’ve actually collected payment and can see the result in your bank account.

You record this information using your cash flow statement. This is a list of all the transactions leading to money coming in and out of your business. When cash comes in, it’s an inflow and your balance should increase. When cash goes out, it’s an outflow, and your balance decreases.

Understanding cash flow can give you a better idea of where your business stands financially, and it can also help you better manage your funds. Intuit found that 52% of business owners have had to forgo sales/projects worth at least $10,000 due to a lack of money on hand. If a cash flow analysis can free up some extra money, it could make a big difference to your bottom line.

What Is Cash Flow Analysis?

In a cash flow analysis, you track the business transactions that impact your cash position and look for trends. At a minimum, this usually means recording changes so you have a better sense of whether your bank balance is going up or down. For business owners who aren’t tracking their numbers, checking their bank account balance can lead to unpleasant surprises.

You could also break down the transactions into categories. There are three main areas of cash flow activities: operating, investing, and financing.

  • Operating: The operating category covers transactions for the actual day-to-day management of your business. This can include both money coming in from making sales and money going out to pay your staff, cover bills, pay rent and utilities, and other costs from running your business.
  • Investing: This category covers long-term investments in your business. For cash outflows, this could be when you spend money to buy equipment, machinery, or a new building. For cash inflows, this could be because you sold some used equipment or real estate.
  • Financing: Financing covers the funding for your business. This could be getting money from a loan or raising capital from investors. For outflows, it would be paying off company debt or sending out profit dividends to yourself and the other owners.

Once you have your data in order, another part of the analysis is trying to find trends and predict your future position. Can you see any patterns? For example, perhaps in the second week of every month, you’ll notice you tend to have a drop in cash because you’re waiting on customer payments. Discovering these patterns can give you more time to prepare and improve your financial wellness. In this scenario, you might delay paying bills until later in the month when you have more money on hand.

How to Do a Cash Flow Analysis

Step 1 – Prepare your cash flow statement.

If your business already puts together financial statements, you can track cash flow on your cash flow statement (one of the big three documents along with your balance sheet and profit and loss statement).

If you don’t currently have a cash flow statement, you should create one to track these transactions. Business accounting software can design one for you. You could also download a free template, like the one provided by SCORE.

Step 2 – Break the statement into the categories.

Each cash flow statement template uses a slightly different approach to organizing transactions. If you’d like to organize the transactions in the three different cash flow categories, you can adjust your statement to that format: In other words, put all the ‘operating’ transactions in that category, all the investing transactions under ‘investing’, and all the financing transactions under ‘financing’.

Step 3 – Track all your transactions.

Throughout the month, you can record each transaction that changes your cash position. Remember, this only applies when actual money goes in and out of your business. If you make a sale but are waiting to collect on a payment, you may want to wait to include it on your statement. For now, you can include only the actual cash transactions.

Step 4 – Review your cash flow statement regularly.

At least once a month, try to check your cash flow statement and tally up the numbers so you can see whether your cash balance has gone up or down. You can also compare the result against your actual bank balance. If the two numbers don’t match, you may have overlooked some transactions or miscalculated.

Step 5 – Look for trends and try to predict future results.

By recording your cash flow position over time, you can see whether it’s growing or shrinking. You may also be able to spot trends, like times during the year when you see a rush of cash or a shortage. To help plan your business spending, you could try forecasting. This is when you predict how your cash position will change in the future. See whether you get the right result and if not, try figuring out what went differently so you can improve your forecasts.

Cash Flow Analysis Example

Steve is a self-employed contractor. He knows that sales are going up, but he is often surprised by his bank balance; it never feels as high as it should be. He decides to start tracking cash flow. In August, his company made $100,000 in revenue. But it worked out like this on his cash flow statement:

Operating cash inflow: $65,000 (incoming payments from customers)

Operating cash outflow: -$40,000 (payments for staff, materials, rent)

Investing cash inflow/outflow: $0

Financing cash inflow/outflow: -$10,000 (payment on a small business loan)

Total net cash flow: $5,000

From this cash flow analysis example, you can see why Steve might get thrown off by his bank balance. In his mind, he’s making six figures in sales, but his cash position only grew by $5,000. One problem is that while he had $100,000 in sales, he only collected 65 cents on the dollar in cash. He may need a better system for tracking invoices and collecting timely payment.

He also owes a sizable amount each month on a small business loan. Paying that off or refinancing to a loan with a lower payment could help him there.

Planning Pitfalls

As you handle your analysis, there are a few common trouble spots to avoid:

Not analyzing cash flow: If you don’t run an analysis, you may not have a clear picture of how you are using your cash.

Not checking frequently: Your cash flow statement shouldn’t sit unused. Update it at least once a month to keep your numbers and your analysis up-to-date. If money is tight, it could be helpful to update your statement even more frequently, like once a week, so you really keep an eye on where your cash is going.

Not breaking down transactions into categories: Seeing that your cash balance has changed isn’t enough; you need to know why. If you’re building cash from making a bunch of sales, that’s a sign of a growing business. If it’s because you made a one-time real estate sale, you need to be more cautious.

Not looking for ways to improve: Behind those numbers on your cash flow statement, there are opportunities for doing a better job, which we look at next.

Cash Flow Tips for the Future

With your cash flow statement in-hand, you can find opportunities to improve your financial position. If you can see patterns throughout the year, knowing those ahead of-time will help you plan earlier. For example, if you know that during the summer your cash starts to dip, you can reduce spending in the Spring to save up for your slow stretch.

You should also pay close attention to how money comes in. If there’s a long lag between sales and incoming cash, it may be time to revisit your invoicing practices. Some ideas include setting earlier payment deadlines, sending out more frequent reminders, giving discounts for early payment, and using invoice automating software to handle this work for you.

The tighter your cash position, the more frequently you should run your cash flow analysis. That way you can catch changes and problems earlier. If you’re worried about cash, it could help at least initially to update your statement weekly. If your business has things under control, you can stick with monthly or even quarterly reviews.

Finally, if you predict an upcoming cash flow crunch, you could take out a small business loan. With small business cash flow loans, you can qualify and get money within days. By anticipating a financing need early, you give yourself time to set up your financing before your business runs out of funds.

Cash Flow Support

As you prepare your cash flow statement, consider working with tax software or a professional accountant to double-check your approach. You could also take courses online or ask a business mentor for help through nonprofits like SCORE or the Women’s Business Development Center.

Above all, don’t be afraid to try cash flow tracking, even if it’s a new skill. An imperfect analysis still provides more information than no analysis at all. As you get better at forecasting, you’ll feel more control over your company finances.

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