How to Do a Cash Flow Analysis with Examples | LendingTree (2024)

Conducting a cash flow analysis allows you to put your cash flow statement under a microscope to see the movement of money into and out of your business. A cash flow analysis illustrates whether your business earns enough income to cover financial obligations, and if you’ve got money left over after the bills are paid. To do a cash flow analysis, you’ll need your cash flow statement, which should include your business income and expenses on a monthly or yearly basis.

Prepare your cash flow analysis: Step by step

To prepare a business cash flow analysis, follow these few steps, which start with gathering financial information about your business.

Step 1. Identify all sources of income.

The first step to understanding how money flows through your business is to identify the income that regularly comes in. You’ll need to calculate your net income when you create a cash flow statement in step three. Your net income is the total amount of income earned in a period of time, minus expenses, taxes and interest owed. So, you first need to tally up all income that your business generates during a specific portion of time including revenue from services rendered or goods sold but also money generated from investments or assets sold. For instance, if you plan to analyze your cash flow for a certain month, quarter or entire year, keep your total income restricted to that period of time.

Step 2. Identify all business expenses.

The second piece of information you’d need to conduct a cash flow analysis is your total business expenses. These may include inventory purchases, accounts payable, deferred revenue for upcoming projects or services or any other liabilities on your books. Other possible expenses include depreciation on fixed assets, as well as income tax expenses. Similar to your total income, you can keep your total business expenses limited to a specific point in time.

Step 3. Create your cash flow statement.

Once you’ve gathered information regarding your business income and expenses, you can then organize the data as a cash flow statement. A cash flow statement typically has three sections that reflect operating income and expenses, company investments and financing arrangements:

• Operating activities: This section represents funds related to your company’s core business activities. After subtracting expenses from income, you should, ideally, be left with a positive number in this section to indicate positive cash flow.
• Investing activities: This section reflects funds related to investing in assets, including the purchase or sale of long-term assets such as property and equipment as well as stocks, bonds or other investments. Combining all investment activities in this section often results in a negative number – maybe your company purchased a new building or vehicles this year.
• Financing activities: This section includes newly borrowed funds and loan repayments along with the issuance or buyback of company stock. Depending on the amount of debt and equity, the final number in this section could be positive or negative.

Step 4. Analyze your cash flow statement.

Now that you’ve done the hard work of plugging in the numbers – see the example worksheet below – it’s time to look for patterns. The final document shows where your money flows in a given period of time. You can see how much of your funds are tied up in debt or investments, as well as the amount of money your business earns after accounting for operating expenses. The sheet also allows you to compare your starting and ending cash amounts.

Your first priority: free cash flow

It would be ideal to see positive cash flow from your operating activities. But it’s also important to maintain investments and make strategic purchases to grow your business. Once you’ve got a positive number in that first section of your cash flow statement, be sure to think about putting some of that surplus back into the business.

Cash flow analysis examples

The details and format of a cash flow statement would likely be different for every business. But each statement should include the same general information – business income and expenses. There are several downloadable cash flow statement templates available online from sites such as Microsoft and SCORE, the business mentorship organization.

Here’s a cash flow analysis example using the cash flow statement format described earlier. This example uses the indirect method, though your business may find it easier to use the direct method. The difference between the two accounting methods comes down to the level of detail you prefer in the operating activities section.

Remember, the information in your cash flow statement and therefore, your cash flow statement analysis, would match your company’s individual circ*mstances. The fields in your statement may not be the same as the fields listed above, and you may need to add more or remove some. For instance, if your business did not buy an existing business, property or intangible assets, then you would not need to include those fields in your cash flow statement.

If you’d like to see real-world examples, you can find the cash flow statements of public companies online. For instance, you can view Amazon’s annual report to see how a major corporation organizes its financial information.

Interpretation of a cash flow statement

Interpreting your cash flow statement when conducting a cash flow analysis shows how much money your business has on hand after taking care of expenses. Cash flow is not the same as profit, which represents sales revenue after expenses have been subtracted. Instead, a cash flow analysis examines your income and spending on a monthly, quarterly or yearly basis.

Better time your expenses

Tracking when your business receives money could help you better budget for regular expenses like payroll and insurance bills. You’d also be able to determine what kinds of business purchases you could afford.

Look out for a negative balance at the end of any given month and examine the timing of money flowing in and out throughout the month to find where you may be overestimating your cash flow. As we mentioned earlier, a negative balance may be normal in the section regarding investing activities.

Look for patterns of deficits

For example, if you notice a deficit in the same month of every year and it has gotten larger over time, you may have an underlying sales issue. Sometimes there is a deficit during months when a large payment is due, such as insurance or quarterly taxes. But if that negative number is becoming larger over time, you may need to adjust your business model.

Tips for small business cash flow management

Once you’ve completed your cash flow analysis, you’d be armed with information that would help you improve cash flow within your business.

1. Plan for upcoming expenses.

Now that you know when money moves in and out of the business, set aside funds for upcoming expenses or for a period when you anticipate a cash crunch. If you know you’re about to hit a slowdown in your business, you can take steps early to ensure your cash flow remains consistent and you can continue to cover your obligations. A business line of credit with no maintenance or annual fee could be one way to ensure you had access to quick funding or wanted to take advantage of a one-time opportunity.

2. Increase your income.

Boosting sales would increase your income from operating activities, as would charging more for your products and services. You may want to consider putting surplus cash into hiring more employees to increase production, or into expanding the business to another location. If you choose to raise prices, be careful not to push customers away. A reduction in customers could create losses that would damage your overall cash flow.

3. Re-examine your payment schedules.

Spreading out your payments to vendors could help you keep more cash on hand for a certain period of time. For instance, you may be able to negotiate a 90-day payment plan with a vendor to delay the due date of your bill. At the same time, you could encourage your customers to pay you at a quicker pace. Consider incentives to encourage early payments, such as discounts on invoices that are paid before the due date. Maximizing the time between receiving payments from customers and paying your vendors would allow you to hang onto your cash as long as possible.