Do you want to know how to do a cash flow analysis? If so, we’re going to cover a lot of key points in this article for you to review, including:

  • Why are cash flow analysis important

  • How to create a monthly cash flow analysis

But before we begin, let’s discuss the idea of a cash flow analysis more and why it’s important.

What Is Cash Flow Analysis?

A cash flow analysis requires that you have a cash flow statement available. These statements should include all of your liquidity based on operating, financing and investing activities. The analysis will involve:

  • Analyzing line items

  • Learning where cash is coming in

  • Learning where cash is going out

Utilizing a cash flow analysis, you can understand the money that the company earned during a specific period of time as well as the money that went out of the business. Through an analysis, it’s possible to have a clear picture of the business’s financial health.

Why Is Cash Flow Analysis Important?

Why would you go through the hassle of analyzing cash flow? It allows you to know the amount of working capital that you have at your disposal. For example, this is the capital that you have to:

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  • Run your business’s operations

  • Pay for and complete transactions

Calculating these figures requires you to calculate the current assets that you have and subtract all of your liabilities. The goal is to ensure that your business has the financial health to satisfy all of your bills.

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Negative cash flow in business may be satisfied by obtaining a loan, but in the long term, negative cash flow can lead to bankruptcy.

Five Steps To Cash Flow Analysis

A lot goes into a cash flow analysis, and you can find things such as templates and software that will help make the process easier. However, the following steps can be taken to go through the process.

First and foremost, you want to prepare a cash flow statement. You’ll need to collect a lot of information, such as the cash you received for products and services, purchase reports, payments to employees, contractors, benefit programs – all instances of cash coming in to and out of the business.

Once you have a cash flow statement to use, you can then work through the following steps to analyze the report:

  1. Review your operating income and aim to have a positive cash flow.

  2. Work through all of the line items to learn how money is coming into and going out of the business.

  3. Analyze your negative cash flow information to understand where you can reduce expenses and find ways to bring cash flow back into a positive.

  4. Run a free cash flow statement. This is done by learning how much money you have left after all of your expenditures.

  5. Find ways to lower expenses or bring in more money to the business.

Cash flow analysis demands that you spend a lot of time reviewing the numbers to learn when and where money is going out of the company. Additionally, you’ll have the ability to find where money is coming into the business and how fast.

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Analysis helps you understand the financial health of your business, but it’s only a small part of the process.

You also need to sit down and determine what the data means. If you’re spending far more than is coming into the business, you’ll need to find ways to bring more money into the business and reduce expenses so that you can continue operations.

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Analyze Cash Flow With Software

Analyzing your daily, weekly, monthly and 13 week cash flow is far easier using software. Accountants have long run their own analysis, but it’s a time-consuming process. Additionally, one error can cause the entire report to be inaccurate.

Software is the best option for running and analyzing cash flow because all of the data is entered into the report automatically.

Not only is software faster, but it will also:

  • Reduce the risk of error

  • Allow you to view and analyze cash flow whenever you like

If you’re not running a cash flow analysis, it’s time to begin. You can learn so much about your business’s health and finances by spending some time analyzing the data that you have available.