How To Do A Cash Flow Analysis With Examples | loan tree (2023)

Performing a cash flow analysis allows you to take a close look at your cash flow statement to see how money is coming in and going out of your business. A cash flow analysis shows whether your business is generating enough income to cover your financial obligations and whether you have cash left over after paying bills. To perform a cash flow analysis, you'll need your cash flow statement, which should include your business income and expenses on a monthly or annual basis.

  • Create your cash flow analysis: step by step
  • Cash Flow Analysis Examples
  • Interpretation of a cash flow statement
  • Cash Flow Management Tips for Small Businesses

Create your cash flow analysis: step by step

To prepare a cash flow analysis, follow these steps beginning with collecting financial information about your business.

Step 1. Identify all sources of income.

The first step in understanding how money flows through your business is to identify the revenue that comes in regularly. You must calculate your net income when you create a statement of cash flows in step three. Your net income is the total income earned in a given period minus expenses,To directand interest owed. Therefore, you must first add up all the income your business generates during a given period, including income from services rendered or goods sold, but also income from investments or goods sold. For example, if you plan to analyze your cash flow for a specific month, quarter, or year, limit your total income to that period.

Step 2. Identify all business expenses.

The second piece of information you need to do a cash flow analysis is yourbusiness expenses🇧🇷 This could include inventory purchases, accounts payable, accrued income for future projects or services, or other obligations on your books. Other possible expenses include depreciation of fixed assets and income tax expenses. Like your total income, you can limit your total business expenses to a specific point in time.

Step 3. Create your cash flow statement.

After collecting information about your business income and expenses, you can organize the data as a cash flow statement. A cash flow statement typically consists of three sections that reflect operating income and expenses, business investments, and financial arrangements:

  • operational activity:This section presents the funds related to the main business activities of your company. After subtracting expenses from income, it is ideal to leave a positive number in this section to indicatecash flow.
  • investment activity:This section reflects funds related to investments in assets, including the purchase or sale of long-term assets, such as property, plant, and equipment, as well as stocks, bonds, or other investments. Summarizing all investment activity in this section usually results in a negative number; Maybe your company bought a new building or vehicles this year.
  • Financing activity:This section includes newly raised funds and loan repayments, as well as the issuance or repurchase of company shares. Depending on the amount of debt and equity, the last number in this section can be positive or negative.

Step 4. Review your cash flow statement.

Now that you've done the hard work of filling in the numbers (see sample worksheet below), it's time to start looking for patterns. The closing document shows where your money is going in a given period of time. You can see how much of your funds are tied up in debt or investments and how much money your business makes after accounting for operating expenses. You can also use the worksheet to compare your starting and ending values.

Your first priority: free cash flow

A positive cash flow from your business activities would be ideal. But it's also important to maintain investments and make strategic purchases to grow your business. Once you get a positive number in the first section of your cash flow statement, consider putting some of that excess back into the business.

Cash Flow Analysis Examples

The details and format of a cash flow statement are likely to be different for every business. But each statement must contain the same general information: business income and expenses. There are several downloadable cash flow statement templates available online at sites likemicrosoftmiSCORE, die Business-Mentoring-Organization.

Here is an example of a cash flow analysis using the cash flow statement format described above. This example uses the indirect method, although it might be easier for your organization to use the direct method. The difference between the two accounting methods is in the level of detail you prefer in the operating activities section.
How To Do A Cash Flow Analysis With Examples | loan tree (1)How To Do A Cash Flow Analysis With Examples | loan tree (2)

Remember that the information in your cash flow statement, and therefore your cash flow statement analysis, reflects the unique circumstances of your business. The fields on your claim may not match the fields listed above and you may need to add more or remove some. For example, if your company has not yet done thisacquireother businesses, real estate, or intangible assets, you would not need to include these fields on your statement of cash flows.

If you want to see real-life examples, you can find public company cash flow statements online. For example, you can seeamazon annual reportto see how a large company organizes its financial information.

Interpretation of a cash flow statement

Interpreting your cash flow statement by performing a cash flow analysis will show you how much cash your business has on hand after deducting expenses. Cash flow is not the same as profit, which is the result of the sale after deducting expenses. In contrast, a cash flow analysis looks at your income and expenses on a monthly, quarterly, or yearly basis.

Plan your expenses better

Tracking when your business receives cash can help you better budget for regular expenses like payroll and insurance bills. You can also determine what types of business purchases you can afford.

Look for a negative balance at the end of each month and examine your cash flow throughout the month to identify where you might be overestimating your cash flow. As already mentioned, a negative balance in the investing activities section can be normal.

Look for deficit patterns

For example, if you have a deficit in the same month every year and it increases over time, you may have an underlying sales problem. Sometimes there are months where a large payment is due, such as B. Insurance or quarterly taxes, a shortfall. But if that negative number increases over time, you may need to adjust your business model.

Cash Flow Management Tips for Small Businesses

Once you've completed your cash flow analysis, you'll be armed with information to help you improve cash flow in your business.

1. Plan for upcoming expenses.

Now that you know when money is coming in and going out of the business, set aside funds for future expenses or for a period when you anticipate a cash shortage. When you know your business is about to slow down, you can take early action to ensure that your cash flow remains stable and you can continue to meet your commitments. Abusiness line of creditThe absence of an annual or maintenance fee can be a way to ensure that you have access to fast financing or want to take advantage of a once-in-a-lifetime opportunity.

2. Increase your income.

Increased sales would increase revenue for your business, as well as higher fees for your products and services. You may want to consider investing the excess money in hiring moreemployeeto increase production or expand the business elsewhere. If you raise prices, be careful not to scare off customers. A drop in the number of customers could result in losses that would affect your overall cash flow.

3. Double check your payment plans.

Splitting your payments between vendors allows you to have more cash available over a period of time. For example, you can negotiate a 90-day payment plan with a provider to extend your bill due date. At the same time, you can encourage your customers to pay faster. Consider incentives to encourage early payments, e.g. B. Discounts oninvoicespaid before the due date. Maximizing the time between receiving payments from customers and paying your vendors allows you to keep your money as long as possible.

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