Business Cash Flow Analysis: The Essentials

A cash flow analysis shows the inflows and outflows to and from your business at a given time. It’s a crucial step in proper cash flow management.

Key takeaways:

• Cash flow is the money moving in and out of a business.
• Poor cash flow management is the leading cause of small business failures.
• A cash flow analysis evaluates what is coming in versus what is going out, which results in positive or negative cash flow.
• Tips for cash flow management:
  1. Reassess bookkeeping practices
  2. Use software
  3. Look to cut costs first
  4. Don’t confuse cash flow and profit

Cash can make or break a business. In fact, poor cash-flow management results in 82% of small business failures, making it the number-one cause. This is why startups and all small businesses, in particular, benefit the most from detailed cash flow analyses to get a sense of likely growth or problems that need to be addressed. In addition, companies experiencing a major transition or expansion should keep an extra-close eye on cash flow.

Here’s are the essentials of conducting a cash flow analysis that helps create a stable, prosperous future.

What is cash flow?

Cash flow is simply the money that moves in and out of a business. It measures all monthly expenses and business costs against revenue coming in. Positive cash flow occurs when more money is coming in than going out, meaning liquid assets are increasing. Negative cash flow is when expenses exceed income.

A cash flow statement is a crucial document that outlines a business’s cash situation over a set period. It lists all inflows from business operations and investments, and outflows that cover business activities. Note that a cash flow statement doesn’t always show all expenses since not all costs are paid immediately. Transactions are recorded as cash outflows when they actually occur.

How to conduct a cash flow analysis

The basic way to perform a cash flow analysis is to look at revenue and expenses over a set period you want to examine. To assess the upcoming month, you would evaluate unpaid purchases for that month and the total sales and other revenue expected to come in. If you see that you’ll have to pay more than is projected to make, you have a cash flow problem. It is a best practice to perform a cash flow analysis each month.

A few business components are involved in this effort, including accounts receivable, accounts payable, inventory, and credit agreements. Each of these elements should be examined in the overall picture, and analysis can be performed on them separately. Doing this helps you uncover what’s going on with a problem area.

For example, taking a close look at accounts receivable will tell you which clients pay on time and which are usually delayed. Knowing when that revenue is likely to come in helps you plan more efficiently against expenses.

Tips for better cash flow management

Regularly conducting analysis won’t solve a cash flow problem on its own. It simply shows business owners what’s going on and what is likely to happen in the near future. However, this assessment is the first step in uncovering an issue and improving practices to address it. So, it is a critical financial practice.

Here are a few tips to getting a handle on cash flow:

1. Reassess bookkeeping practices

Businesses must keep financial records organized. Otherwise, it’s hard to stay current with reports and statements that guide decision-making. These documents are also crucial when obtaining capital from investors or lenders. Reevaluate your bookkeeping practices. Make sure you’re dedicating enough time to these tasks and are updating the information regularly.

2. Use software

You may not have the time or organizational skills to manage everything manually. Instead, try out an accounting software platform that helps manage cash flow statements using automation. It’s much easier to keep everything up to date and generate reports with a good, dedicated program.

3. Look to cut costs first

When there’s a problem with cash flow, the first place to address the discrepancy should be in your expenses. Look closely to see if there’s anything you can cut, at least for now. Research to see if you could get the same services for a lower price. Reach out to vendors and negotiate. There are many steps you can take to lower expenses.

4. Don’t confuse cash flow and profit

Some months, a cash flow analysis may show that you have positive cash flow, which is good. But this doesn’t necessarily mean that the business is profitable. Profit is the overall amount of money you have left after paying expenses, whereas cash flow measures the net flow of cash in and out of your business at a given time. So, you can still be profitable overall and experience negative cash flow in a given month, for instance. 

A cash flow analysis is essential to determine what’s going in and out of your business so you can keep things trending positive and meet your obligations. This analysis works in conjunction with other financial reports to give you a holistic view of business performance to make informed decisions. 

Remember, cash crunches are the number-one small-business killer. So, it’s crucial to conduct a reasonably simple cash flow analysis regularly and diligently.

The Provident CPA and Business Advisors team helps business owners with strategies and tax minimization, helping them grow while paying the least amount of tax legally possible. Reach out to our team to learn more about our services.