How to Develop a Cash Flow Analysis for your Business

Running a business isn’t just about having impeccable customer service; it also involves knowing the vital details and inner workings of company cash flow. In order to start, operate, or expand your business prudently you must have a clear understanding of your profits, debts, and value of assets. Each accounting period, you should develop a cash flow statement to help you determine the current health status of your business and help you make educated cash flow projections.

How Your Money Moves

The bulk of your cash inflow comes from day to day operations. This includes collection of money for services rendered and products sold. This can also include interest garnered by assets, secured loans, and lines of credit. Your outflow can include business expenditures, debt payments, and business purchases.

Tracking Your Flow

In order to maintain a sustainable cash balance each period, you must first find out when and how your money moves. This means analyzing the cash statements of accounts payable and receivable throughout the accounting period. Basing your analysis on an accrual basis will not give you a clear picture of what money is currently flowing into your account since it accrual accounting is based in future and projected earnings, not what is actually cash on hand. Track your flow by running a cash-based profit and loss statement.

Developing a Cash Flow Statement

The cash flow statement will only be accurate if you have an accurate beginning and ending period balance. This statement is divided into three parts; namely:

Operation Activities: This will help you determine the final net income and loss of operation activities. This can include money earned from operational profits as well as money lost due to business expenditures. 

Investment Activities: These activities will include money gained or lost from long term investments such as property, securities, assets, and equipment. An example of investment inflow would be selling off of assets or equipment and garnering a profit from the sale. An example of outflow would be purchasing equipment like new office computers or machinery.

Financing Activities: Financing activities are related to inflow or outflow of cash associated with loans and other business financing ventures. For example, securing a financing loan to start your business would be considered cash inflow, paying the monthly payment for that loan would be outflow.

Analyzing Cash Flow Projections

Once you have a cash flow statement for each accounting period you can begin forecasting and projecting your possible cash on hand for the year. Each business has a specific and unique pattern for cash flow due to seasonal business influx or deficits, customer credit terms, and types of assets. When you have a set of cash flow statements available, you will be able to analyze these patterns which will effectively aid you in making more educated decisions about when and where you should allocate resources; especially during times of the fiscal year you see the most deficit.

The cash flow analysis is designed to help you keep you money during times of prosperity and maintain a healthy account balance when times are tough. Keeping a watchful eye on cash flow will help you avoid or possible financial pitfalls and will aid you in developing solid risk management and mitigation plans. 


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