Performing a Cash Flow Check-Up (2024)

Cash flow is the amount of cash and cash equivalents, such as securities, that a businessgenerates or spends over a set time period. Cash on hand determines a company’srunway—the more cash on hand and the lower the cash burn rate, the more room abusiness has to maneuver and, normally, the higher its valuation.

Cash flow differs from profit. Cash flow refers to the money that flows in and out of yourbusiness. Profit, however, is the money you have after deducting your business expenses fromoverall revenue.

What Is Cash Flow Analysis?

There are three cash flow types that companies should track and analyze to determine theliquidity and solvency of the business: cash flow from operating activities, cash flow frominvesting activities and cash flow from financing activities. All three are included on acompany’s cash flow statement.

In conducting a cash flow analysis, businesses correlate line items in those three cash flowcategories to see where money is coming in, and where it’s going out. From this, theycan draw conclusions about the current state of the business.

Depending on the type of cash flow, bringing in money in isn’t necessarily a goodthing. And, spending money it isn’t necessarily a bad thing.

Video: What Is Cash Flow Analysis?

Key Takeaways

  • Cash flow analysis helps you understand how much cash a business generated or usedduring a specific accounting period.
  • Understanding cash sources and where your cash is going is essential for maintaining afinancially sustainable business.
  • A business may be profitable and still experience negative cash flow or lose money andexperience positive cash flow.
  • Complementary measurements, such as free cash flow and unlevered free cash flow, offerunique insights into a company’s financial health.

Cash Flow Analysis Explained

Cash flow is a measure of how much cash a business brought in or spent in total over a periodof time. Cash flow is typically broken down into cash flow from operating activities,investing activities, and financing activities on the statement of cash flows, a commonfinancial statement.

While it’s also important to look at business profitability on the income statement,cash flow analysis offers critical information on the financial health of a company. Ittells you if cash inflows are coming from sales, loans, or investors, and similarinformation about outflows. Most businesses can sustain a temporary period of negative cashflows, but can’t sustain negative cash flows long-term.

Newer businesses may experience negative cash flow from operations due to high spending ongrowth. That’s okay if investors and lenders are willing to keep supporting thebusiness. But eventually, cash flow from operations must turn positive to keep the businessopen as a going concern.

Cash flow analysis helps you understand if a business’s healthy bank account balance isfrom sales, debt, or other financing. This type of analysis may uncover unexpected problems,or it may show a healthy operating cash flow. But you don’t know either way until youreview your cash flow statements or perform a cash flow analysis.

In addition to looking at the standard cash flow statement and details, it’s often alsouseful to calculate different versions of cash flow to give you additional insights. Forexample, free cash flow excludes non-cash expenses and interest payments and adds in changesin working capital, which gives you a clearer view of operating cash flows. Unlevered freecash flow shows you cash flow before financial obligations while levered free cash flowexplains cash flow after taking into account all bills and obligations.

Depending on the size of your company, your financial situation, and your financial goals,reviewing and tracking various forms of cash flow may be very helpful in financial planningand preparing for future quarters, years, and even a potential downturn in sales or economicconditions.

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Why Is Cash Flow Analysis Important?

A cash flow analysis determines a company’s working capital — the amount of moneyavailable to run business operations and complete transactions. That is calculated as(opens innewtab) current assets (cash or near-cashassets, like notes receivable) minus current liabilities (liabilities due during theupcoming accounting period).

Cash flow analysis helps you understand if your business is able to pay its bills andgenerate enough cash to continue operating indefinitely. Long-term negative cash flowsituations can indicate a potential bankruptcy while continual positive cash flow is often asign of good things to come.

Cash Flow Analysis Basics

Cash flow analysis first requires that a company generate cash statements(opens in new tab)about operating cash flow, investing cash flow and financing cash flow.

  • Cash from operating activities represents cash received from customersless the amount spent on operating expenses. In this bucket are annual, recurringexpenses such as salaries, utilities, supplies and rent.
  • Investing activities reflect funds spent on fixed assets and financialinstruments. These are long-term, or capital investments, and include property, assetsin a plant or the purchase of stock or securities of another company.
  • Financing cash flow is funding that comes from a company’sowners, investors and creditors. It is classified as debt, equity and dividendtransactions on the cash flow statement.

How Do You Perform Cash Flow Analysis?

To perform a cash flow analysis, you must first prepare operating, investing and financingcash flow statements. Generally, the finance team uses the company’s accounting software togenerate these statements. Alternately, there are a number of free templates available.(opens in new tab)

Preparing a Cash Flow Statement

Let’s first look at preparing the operating cash flow statement. The line items thatare factored into the company’s net income and are included on the company’soperating cash flow statement include but are not limited to:

  • Cash received from sales of goods or services
  • The purchase of inventory or supplies
  • Employees’ wages and cash bonuses
  • Payments to contractors
  • Utility bills, rent or lease payments
  • Interest paid on loans and other long-term debt and interest received on loans
  • Fines or cash settlements from lawsuits

There are two common methods used to calculate and prepare the operating activities sectionof cash flow statements.

The Cash Flow Statement Direct Method takes all cash collections fromoperating activities and subtracts all of the cash disbursements from the operatingactivities to get the net income.

The Cash Flow Statement Indirect Method starts with net income and adds ordeducts from that amount for non-cash revenue and expense items.

The next component of a cash flow statement is investing cash flow. That bottom line iscalculated by adding the money received from the sale of assets, paying back loans orselling stock and subtracting money spent to buy assets, stock or loans outstanding.

Finally, financing cash flow is the money moving between a company and its owners, investorsand creditors.

Cash Flow Analysis Example

Net income adjusted for non-cash items such as depreciation expenses and cashprovided for operating assets and liabilities. Using a free public templatefrom the Small Business Administration (SBA), let’s say Wild Bill’s Dog Trainersand Walkers had a net income of $100,000 to start and generated additional cash inflows of$220,000.

As you can see in the spreadsheet, it spent $41,000 on operating cash outflows like hiring anadditional person, buying new equipment for the dog park, paying taxes and more. The ownerpaid some principal down on a loan and took a draw of $50,000 for an ending cash balance of$127,200. Small changes in any of those line items show the impact of hiring more people,paying more taxes, buying more equipment and more to ensure the business has a healthybalance sheet and doesn’t go “into the red.”

Wild Bill’s Dog Trainers and Walkers

[Month][Month][Month][Month][Month][Month]Total
Beginning Cash Balance100,000$127,200
Cash Inflows (Income):
Accts. Rec. Collections80,000 80,000
Loan Proceeds20,000 20,000
Sales & Receipts20,000 20,000
Other: 0
Total Cash Inflows$120,000 $0 $0 $0 $0 $0 $120,000
Available Cash Balance$220,000 $127,200
Cash Outflows (Expenses):
Advertising100 100
Bank Service Charges100 100
Credit Card Fees500 500
Delivery0 0
Health Insurance4,000 4,000
Insurance1,000 1,000
Interest1,000 1,000
Inventory Purchases5,000 5,000
Miscellaneous300 300
Office200 200
Payroll8,000 8,000
Payroll Taxes20,000 20,000
Professional Fees100 100
Rent or Lease1,000 1,000
Subscriptions & Dues200 200
Supplies100 100
Taxes & Licenses100 100
Utilities & Telephone100 100
Other:0 0
Subtotal$41,800 $0 $0 $0 $0 $0 $41,800
Other Cash Out Flows:
Capital Purchases0 0
Loan Principal1,000 1,000
Owner’s Draw50,000 50,000
Other: 0
Subtotal$51,000 $0 $0 $0 $0 $0 $51,000
Total Cash Outflows$92,800 $0 $0 $0 $0 $0 $92,800
Ending Cash Balance$127,200$127,200

This automated form is made available compliments of CCH Business Owner’sToolkit

Five Steps to Cash Flow Analysis

There are a few major items to look out for trends and outliers that can tell you a lot aboutthe health of the business.

  1. Aim for positive cash flow

    When operating income exceeds net income, it’s a strong indicator of acompany’s ability to remain solvent and sustainably grow its operations.

  2. Be circumspect about positive cash flow

    On the other hand, positive investing cash flow and negative operating cash flowcould signal problems. For example, it could indicate a company is selling offassets to pay its operating expenses, which is not always sustainable.

  3. Analyze your negative cash flow

    When it comes to investing cash flow analysis, negative cash flow isn’tnecessarily a bad thing. It could mean the business is making investments inproperty and equipment to make more products. A positive operating cash flow and anegative investing cash flow could mean the company is making money and spending itto grow.

  4. Calculate your free cash flow

    What you have left after you pay for operating expenditures and capital expendituresis free cash flow. This can be used to pay down principal, interest, buy back stockor acquire another company.

  5. Operating cash flow margin builds trust

    The operating cash flow margin ratio measures cash from operating activities as apercentage of sales revenue in a given period. A positive margin demonstratesprofitability, efficiency and earnings quality.

Cash flow analysis helps your finance team better manage cash inflow and cash outflow,ensuring that there will be enough money to run—and grow—the business.

Free Cash Flow Analysis Template

With modern accounting and bookkeeping software, or an updated ERP, you canlikely generate a statement of cash flows with just a few clicks. Ifyou’re new to free cash flow analysis, here’s a template you mayfind helpful in calculating cash flow for your business.

View the template here(opens innewtab)

Analyze Cash Flow With Software

The math behind a free cash flow analysis can be complex, particularly for large companies orthose with complex finances. However, bookkeeping or accounting software, sometimes part ofa larger ERP, take care of much of the heavy lifting for you. Once your reports are setup inan ERP like Oracle NetSuite, your cash flow, free cash flow, and other numbers, and theunderlying details, are just a few clicks away.

Large companies employ teams of financial planning and analysis (FP&A) professionals whospend their entire workday digging into the details of financial results looking forpatterns and opportunities to improve results. With a powerful ERP available, much of thatprocess is automated, allowing you to do more with fewer staff.

Small businesses and large enterprises alike should understand their cash flow and cashposition with regular check-ins. NetSuite helps you achieve better results through automatedreporting, machine learning and AI-driven analysis, and extensive financial analysis toolsto give you accurate, timely information about your business.

Cash Flow Analysis Is Critical for Every Business

Savvy investors would never buy the stock of a company without first looking at its financialstatements, including cash flow. A more detailed cash flow analysis — providedthrough ERP and advanced accounting software— offers insights into the financial health and future performance of a business.Business owners, managers, and executives should look at similar data on their companies ona regular basis to ensure it’s on track to meet its short-term and long-term financialgoals.

Cash flow and cash flow analysis are important for virtually every business. Working withoutcash flow knowledge is like a pilot flying blind. Never run your business without updated,accurate cash flow data.

Cash Flow Analysis FAQs

What is cash flow analysis with an example?

Cash flow analysis is a method of reviewing cash flow details for a business. An example maybe as simple as looking at the latest cash flow statement or require more complexcalculations, ratios, and comparisons.

What is the purpose of cash flow analysis?

Cash flow analysis helps business owners, managers, executives, lenders, and shareholdersunderstand if a company is generating cash or using cash, and the breakdown of where thosecash movements are happening in the company.

How do you analyze cash flow?

Cash flow analysis typically begins with the statement of cash flows, which breaks down cashflows into sections for operating, financing, and investing activities. Analysis includeslooking for trends, areas of strong performance, cash flow problems, and opportunities forimprovement.

What is cash flow software?

Cash flow software is software that helps calculate and analyze cash flow. Bookkeepingsoftware, accounting software, and ERP software typically include cash flow software modulesor components.

What is a cash flow analysis?

Cash flow analysis is a review of business cash flows with a goal of finding trends oropportunities that allow for improved business decisions and improved long-term growth andsustainability.

What tools do you currently use to manage cash flows?

Most business leaders looking to manage cash flows use their ERP or accounting software as akey tool, such as Oracle NetSuite. They may also use spreadsheet software to complementanalysis and research.

I am a seasoned financial analyst with a proven track record in cash flow analysis and financial planning. With an extensive background in accounting and finance, I have successfully guided businesses through various economic conditions, providing valuable insights into their cash flow dynamics.

Now, let's delve into the key concepts covered in the provided article on cash flow analysis:

  1. Cash Flow Definition:

    • Cash flow is the net amount of cash and cash equivalents moving in and out of a business over a specified time period. It includes securities and determines a company's financial runway.
  2. Cash Flow vs. Profit:

    • Cash flow differs from profit. Profit is the amount left after deducting business expenses from overall revenue. Cash flow, on the other hand, focuses on the actual cash movement.
  3. Types of Cash Flow:

    • Companies track three types of cash flow:
      • Cash flow from operating activities
      • Cash flow from investing activities
      • Cash flow from financing activities
    • These are detailed in a company's cash flow statement.
  4. Cash Flow Analysis Process:

    • Businesses analyze cash flow by correlating line items in the three cash flow categories to understand the sources and uses of money.
    • This analysis helps draw conclusions about the current state of the business.
  5. Additional Cash Flow Measurements:

    • Complementary metrics like free cash flow and unlevered free cash flow provide unique insights into a company's financial health.
  6. Importance of Cash Flow Analysis:

    • Cash flow analysis determines a company's working capital, vital for daily operations.
    • It helps assess a company's ability to pay bills and generate enough cash for sustainable operations.
  7. Cash Flow Analysis Basics:

    • Cash flow analysis involves generating statements for operating, investing, and financing cash flows.
    • Operating cash flow includes cash received from customers minus operating expenses.
  8. Performing Cash Flow Analysis:

    • Preparation of cash flow statements involves either the direct method or indirect method.
    • Investing cash flow involves transactions related to assets, while financing cash flow pertains to funding from owners, investors, or creditors.
  9. Cash Flow Analysis Example:

    • The article provides an example of cash flow analysis for a fictional business, illustrating cash inflows and outflows.
  10. Steps to Cash Flow Analysis:

    • The article outlines five steps for cash flow analysis, emphasizing the importance of positive cash flow and analyzing trends.
  11. Free Cash Flow Analysis Template:

    • A template for analyzing cash flow is provided, offering a structured approach to understanding cash movements.
  12. Analyzing Cash Flow with Software:

    • The article recommends using accounting software or ERP systems for efficient cash flow analysis, particularly for large companies.
  13. Cash Flow Analysis FAQs:

    • FAQs cover the purpose of cash flow analysis, tools used for managing cash flows, and the importance of regularly reviewing financial statements.

In conclusion, a comprehensive understanding of cash flow analysis is crucial for businesses to make informed financial decisions and ensure long-term sustainability.

Performing a Cash Flow Check-Up (2024)
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