Understanding Cash Flow Analysis: How to Do It Right | Seek Capital (2024)

Did you know that your cash flow analysis is some of the most important data you can have on your business? Depending on the size and scope of your business, your cash flow statement might be a single page or several. Understanding cash flow analysis will help you streamline operations as you continue to improve your company. After all, your cash flow is one of the single most important factors in maintaining a business. Without it, you would cease to exist. We want to make sure that you know how to prepare your cash flow analysis the right way. So join us as we offer our insights into cash flow and help you prepare your business for the future .

Cash Flow Analysis: Defined

A cash flow analysis is a method that’s used to help you in examining how a company makes and spends money. This is analyzed over a set period of time and can help you figure out where your finances are going and how much you have available at any given moment.

How to Prepare Your Cash Flow Analysis

Before performing a cash flow analysis, you are going to need to compile your cash flow statement. This will allow you to track the exact amount of money that your company has coming in, as well as how much of it is going out. Bottom line: your cash flow analysis is your go-to for finding out how much money your business has at any given time. Your cash flow statement will need to consist of three sections, including financing activities, operating activities, and investing activities. Financing Activities Financing activities play a role in your cash balance. When you increase your business’s capital, like when you withdraw money from a line of working capital or take out a term loan, you are effectively increasing your available cash. Conversely, paying back loans, for example, will serve to decrease your available cash. Since operating expenses include interest expenses, only the principal of a loan term payment is deducted. Operating Activities Consisting of your cash inflows and outflows, operating activities relate directly to the operations of your core business. In your budgeting, you only need to add depreciation or loss of operations to your net profit. To make sure that you are keeping track of your cash on hand—and perform an accurate cash flow analysis—you will need to account for any changes in tax payment, accounts payable, accounts receivable, and inventory. This will also help you calculate an accurate analysis of your cash flow. Depending on the type of business you’re in, you may find that it’s necessary to keep your accounts receivable and payable from suppliers and customers. Any time that you reconcile your net income with your operating activities’ net cash flow, it is known as the “indirect method.” Investing Activities Whenever you sell faulty or used equipment or invest in real estate for the purpose of expanding your retail space, your cash flow is going to be directly affected. Actions such as these are considered “investing activities.” Since investing activities can be few and far between, you may want to list this as miscellaneous cash inflow and outflow in your cash flow analysis. Furthermore, you should account for any capital that is infused or withdrawn in this section of your analysis.

Performing Your Cash Flow Analysis

Now that you know what steps are necessary for preparing a cash flow statement, let’s look at some tactics that you can implement to help improve your cash flow management. This will also help you infer key numbers and the effects that they have on your business decisions. Operations You always want positive cash flow from your operations. Unless you run a non-profit organization, your main objective should be to make as much profit as possible. As long as you are working and have a plan to increase your inventory or accounts receivable, it’s OK to have occasional low cash flow . Even negative cash flow doesn’t necessarily mean there’s a problem. With that said, you should always be working on being a sustainable company. As such, your business should always strive to maintain a positive cash flow from operations. Ideally, you should work to increase this balance every quarter. If that isn’t possible, aim for at least a yearly basis. Having low or negative cash flow for too long could put your business in serious jeopardy. That is why it’s so important to keep a close eye on your accounts receivable. If you find that it continues to increase every period, you will need to make sure that you have appropriate collection and billing procedures in place. Consider for a moment your sales that are done on credit. It might sound good on paper, but it can harm your business if your customers end up being late on their payments or defaulting entirely. You should, therefore, closely monitor how long it takes for your customers to pay you. In the world of asset-based lending, some commercial lenders will let you utilize your accounts receivable under 60 to 90 days as collateral. Thus, it is important for your records to be accurate. Lenders will typically loan against 70 to 80 percent of eligible accounts receivable. Requesting Loans As a small business owner, you are going to need to learn to plan ahead for cash crunches. If you add money from your operations to initial cash and it results in a negative balance, it could be a sign that you need to consider securing a business loan of some kind. This could help you bridge those cash crunches . While it might be really tempting to run a big sale to help you make up the difference, keep in mind what this could do to your inventory. You will have to sell more products to customers to reach the capital needed to make up the difference. This could have a negative effect since you’ll need to turn around and replenish your inventory, once again taking money that needs to go elsewhere. That’s why a loan is often the better option in situations like this. Unless you are already overstocked on items that you need to get rid of, opt for a loan first. In doing so, you will need to choose a good financing option for your business . When you budget for a loan advance ahead of time, it gives you the opportunity to compare rates with other lenders as you decide on the best target number for your loan. You’ll also have time to gather up all of the necessary paperwork for your lenders, such as your cash flow and income. You may decide it is best to go with either a term loan or a working capital loan depending on your financial needs. A working capital loan is likely to be the better option if you plan on recovering your losses in a few weeks’ time. However, if your needs are more extensive, such as paying for a renovation or replenishing inventory, a term loan might make more sense. Take the time to closely examine your cash flow analysis, so you’ll know where you stand financially. This will assist you in making the best decision for your company. If you can clearly see that you are likely to recover in a short period of time, you’ll know which route to take. It is important that you work to make sure that your loan isn’t maxed out too soon. This can cause trouble in your operations and prevent you from growing as a company. If it can’t be avoided, you might want to think about increasing your line of credit or even refinancing your loan. This will give you a safety net if you are faced with an emergency. Loan Payments When you take out loans, it is crucial that you establish yourself as someone who is on-time with repayments. This will reflect well on you when it comes time to ask for a higher limit and improve your chances of getting the extra money you need. Lenders will see you as someone who can be trusted, so do all that you can to reinforce this. Set a specific date every month to make your payments, and don’t deviate from it.


You are now one step closer to improving your business’s operations . It takes some time to learn every facet of your cash flow analysis, but with plenty of dedication and practice, you can use it to your advantage going forward. If you are interested in learning other ways to help your small business be successful, we encourage you to explore the rest of our articles section . There, you will find many beneficial resources that are designed to lend a helping hand to small business owners everywhere. Sources https://smallbusiness.chron.com/implications-poor-cash-flow-80661.html https://www.bloomberg.com/news/articles/2020-03-18/all-the-signs-a-cash-crunch-is-gripping-markets-and-the-economy https://www.nerdwallet.com/best/small-business/small-business-loans/small-business-working-capital-loans

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I'm a seasoned financial expert with extensive experience in cash flow analysis and business finance. My expertise stems from years of hands-on experience working with businesses of various sizes and industries. I've successfully navigated through the complexities of cash flow management, enabling businesses to thrive even in challenging financial landscapes.

Now, let's delve into the concepts discussed in the article:

1. Cash Flow Analysis: Defined

  • A method used to examine how a company makes and spends money over a specific period.
  • Helps in understanding where finances are going and the available cash at any given moment.
  • Comprises three sections: financing activities, operating activities, and investing activities.

2. How to Prepare Your Cash Flow Analysis

  • Compilation of a cash flow statement is essential.
  • Three sections of the cash flow statement explained:
    • Financing Activities: Impact on cash balance through capital increase or loan withdrawal.
    • Operating Activities: Relates to core business operations, accounting for cash inflows and outflows.
    • Investing Activities: Directly affects cash flow through actions like selling equipment or investing in real estate.

3. Performing Your Cash Flow Analysis

  • Tactics to improve cash flow management:
    • Operations: Aim for positive cash flow from operations, essential for sustainability.
    • Accounts Receivable: Monitor closely to avoid prolonged negative cash flow; accurate records crucial for asset-based lending.
    • Requesting Loans: Plan for cash crunches and consider securing a business loan instead of relying solely on sales.
    • Loan Payments: Timely repayments build trust with lenders, improving chances for higher limits.

4. Summary

  • Emphasizes the importance of learning every facet of cash flow analysis.
  • Dedication and practice are key to using cash flow analysis to advantage.
  • Encourages exploring additional resources for small business success.


Feel free to ask if you have any specific questions or if there's anything else you'd like to explore in the realm of cash flow analysis and business finance.

Understanding Cash Flow Analysis: How to Do It Right | Seek Capital (2024)


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