Performing a Cash Flow Check-Up (2024)

Cash flow is the amount of cash and cash equivalents, such as securities, that a businessgenerates or spends over a set time period. Cash on hand determines a company’srunway—the more cash on hand and the lower the cash burn rate, the more room abusiness has to maneuver and, normally, the higher its valuation.

Cash flow differs from profit. Cash flow refers to the money that flows in and out of yourbusiness. Profit, however, is the money you have after deducting your business expenses fromoverall revenue.

What Is Cash Flow Analysis?

There are three cash flow types that companies should track and analyze to determine theliquidity and solvency of the business: cash flow from operating activities, cash flow frominvesting activities and cash flow from financing activities. All three are included on acompany’s cash flow statement.

In conducting a cash flow analysis, businesses correlate line items in those three cash flowcategories to see where money is coming in, and where it’s going out. From this, theycan draw conclusions about the current state of the business.

Depending on the type of cash flow, bringing in money in isn’t necessarily a goodthing. And, spending money it isn’t necessarily a bad thing.

Video: What Is Cash Flow Analysis?

Key Takeaways

  • Cash flow analysis helps you understand how much cash a business generated or usedduring a specific accounting period.
  • Understanding cash sources and where your cash is going is essential for maintaining afinancially sustainable business.
  • A business may be profitable and still experience negative cash flow or lose money andexperience positive cash flow.
  • Complementary measurements, such as free cash flow and unlevered free cash flow, offerunique insights into a company’s financial health.

Cash Flow Analysis Explained

Cash flow is a measure of how much cash a business brought in or spent in total over a periodof time. Cash flow is typically broken down into cash flow from operating activities,investing activities, and financing activities on the statement of cash flows, a commonfinancial statement.

While it’s also important to look at business profitability on the income statement,cash flow analysis offers critical information on the financial health of a company. Ittells you if cash inflows are coming from sales, loans, or investors, and similarinformation about outflows. Most businesses can sustain a temporary period of negative cashflows, but can’t sustain negative cash flows long-term.

Newer businesses may experience negative cash flow from operations due to high spending ongrowth. That’s okay if investors and lenders are willing to keep supporting thebusiness. But eventually, cash flow from operations must turn positive to keep the businessopen as a going concern.

Cash flow analysis helps you understand if a business’s healthy bank account balance isfrom sales, debt, or other financing. This type of analysis may uncover unexpected problems,or it may show a healthy operating cash flow. But you don’t know either way until youreview your cash flow statements or perform a cash flow analysis.

In addition to looking at the standard cash flow statement and details, it’s often alsouseful to calculate different versions of cash flow to give you additional insights. Forexample, free cash flow excludes non-cash expenses and interest payments and adds in changesin working capital, which gives you a clearer view of operating cash flows. Unlevered freecash flow shows you cash flow before financial obligations while levered free cash flowexplains cash flow after taking into account all bills and obligations.

Depending on the size of your company, your financial situation, and your financial goals,reviewing and tracking various forms of cash flow may be very helpful in financial planningand preparing for future quarters, years, and even a potential downturn in sales or economicconditions.

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Why Is Cash Flow Analysis Important?

A cash flow analysis determines a company’s working capital — the amount of moneyavailable to run business operations and complete transactions. That is calculated as(opens innewtab) current assets (cash or near-cashassets, like notes receivable) minus current liabilities (liabilities due during theupcoming accounting period).

Cash flow analysis helps you understand if your business is able to pay its bills andgenerate enough cash to continue operating indefinitely. Long-term negative cash flowsituations can indicate a potential bankruptcy while continual positive cash flow is often asign of good things to come.

Cash Flow Analysis Basics

Cash flow analysis first requires that a company generate cash statements(opens in new tab)about operating cash flow, investing cash flow and financing cash flow.

  • Cash from operating activities represents cash received from customersless the amount spent on operating expenses. In this bucket are annual, recurringexpenses such as salaries, utilities, supplies and rent.
  • Investing activities reflect funds spent on fixed assets and financialinstruments. These are long-term, or capital investments, and include property, assetsin a plant or the purchase of stock or securities of another company.
  • Financing cash flow is funding that comes from a company’sowners, investors and creditors. It is classified as debt, equity and dividendtransactions on the cash flow statement.

Preparing a Cash Flow Statement

Let’s first look at preparing the operating cash flow statement. The line items thatare factored into the company’s net income and are included on the company’soperating cash flow statement include but are not limited to:

  • Cash received from sales of goods or services
  • The purchase of inventory or supplies
  • Employees’ wages and cash bonuses
  • Payments to contractors
  • Utility bills, rent or lease payments
  • Interest paid on loans and other long-term debt and interest received on loans
  • Fines or cash settlements from lawsuits

There are two common methods used to calculate and prepare the operating activities sectionof cash flow statements.

The Cash Flow Statement Direct Method takes all cash collections fromoperating activities and subtracts all of the cash disbursem*nts from the operatingactivities to get the net income.

The Cash Flow Statement Indirect Method starts with net income and adds ordeducts from that amount for non-cash revenue and expense items.

The next component of a cash flow statement is investing cash flow. That bottom line iscalculated by adding the money received from the sale of assets, paying back loans orselling stock and subtracting money spent to buy assets, stock or loans outstanding.

Finally, financing cash flow is the money moving between a company and its owners, investorsand creditors.

Cash Flow Analysis Example

Net income adjusted for non-cash items such as depreciation expenses and cash provided for operating assets and liabilities.

Hannah’s Bananas: Cash Flow Statement for the Month Ended March 2024

Cash Flow CategoryAmount ($)
Cash Flows from Operating Activities
Cash Received from Customers150,000
Cash Paid to Suppliers and Employees(100,000)
Interest Paid(5,000)
Income Taxes Paid(10,000)
Net Cash Provided by Operating Activities35,000
Cash Flows from Investing Activities
Purchase of Equipment(20,000)
Proceeds from Sale of Property5,000
Net Cash Used in Investing Activities(15,000)
Cash Flows from Financing Activities
Proceeds from Issuance of Stock10,000
Repayment of Bank Loan(5,000)
Dividends Paid(3,000)
Net Cash Provided by (Used in) Financing Activities2,000
Net Increase in Cash for the Period22,000
Cash at Beginning of Period50,000
Cash at End of Period72,000

Hannah’s Bananas financial report shows a cash flow increase in $22,000 for the month. The company’s effective operations led to an inflow of $35,000, demonstrating its ability to manage core business activities profitably. Despite some spending on investing activities resulting, it signifies a focus on long term growth. Meanwhile, the moderate net inflow from financing activities suggests an approach to managing equity and debt. Hannah’s Bananas is strategically financing its growth while also rewarding shareholders with dividends. Overall, the company’s cash flow actions highlight efficiency investments for growth and sound financial management practices that set the stage for future stability and expansion.

Five Steps to Cash Flow Analysis

There are a few major items to look out for trends and outliers that can tell you a lot aboutthe health of the business.

  1. Aim for positive cash flow

    When operating income exceeds net income, it’s a strong indicator of acompany’s ability to remain solvent and sustainably grow its operations.

  2. Be circ*mspect about positive cash flow

    On the other hand, positive investing cash flow and negative operating cash flowcould signal problems. For example, it could indicate a company is selling offassets to pay its operating expenses, which is not always sustainable.

  3. Analyze your negative cash flow

    When it comes to investing cash flow analysis, negative cash flow isn’tnecessarily a bad thing. It could mean the business is making investments inproperty and equipment to make more products. A positive operating cash flow and anegative investing cash flow could mean the company is making money and spending itto grow.

  4. Calculate your free cash flow

    What you have left after you pay for operating expenditures and capital expendituresis free cash flow. This can be used to pay down principal, interest, buy back stockor acquire another company.

  5. Operating cash flow margin builds trust

    The operating cash flow margin ratio measures cash from operating activities as apercentage of sales revenue in a given period. A positive margin demonstratesprofitability, efficiency and earnings quality.

Cash flow analysis helps your finance team better manage cash inflow and cash outflow,ensuring that there will be enough money to run—and grow—the business.

Free Cash Flow Analysis Template

With modern accounting and bookkeeping software, or an updated ERP, you canlikely generate a statement of cash flows with just a few clicks. Ifyou’re new to free cash flow analysis, here’s a template you mayfind helpful in calculating cash flow for your business.

View the template here(opens innewtab)

Analyze Cash Flow With Software

The math behind a free cash flow analysis can be complex, particularly for large companies orthose with complex finances. However, bookkeeping or accounting software, sometimes part ofa larger ERP, take care of much of the heavy lifting for you. Once your reports are setup inan ERP like Oracle NetSuite, your cash flow, free cash flow, and other numbers, and theunderlying details, are just a few clicks away.

Large companies employ teams of financial planning and analysis (FP&A) professionals whospend their entire workday digging into the details of financial results looking forpatterns and opportunities to improve results. With a powerful ERP available, much of thatprocess is automated, allowing you to do more with fewer staff.

Small businesses and large enterprises alike should understand their cash flow and cashposition with regular check-ins. NetSuite helps you achieve better results through automatedreporting, machine learning and AI-driven analysis, and extensive financial analysis toolsto give you accurate, timely information about your business.

Cash Flow Analysis Is Critical for Every Business

Savvy investors would never buy the stock of a company without first looking at its financialstatements, including cash flow. A more detailed cash flow analysis — providedthrough ERP and advanced accounting software— offers insights into the financial health and future performance of a business.Business owners, managers, and executives should look at similar data on their companies ona regular basis to ensure it’s on track to meet its short-term and long-term financialgoals.

Cash flow and cash flow analysis are important for virtually every business. Working withoutcash flow knowledge is like a pilot flying blind. Never run your business without updated,accurate cash flow data.

Cash Flow Analysis FAQs

What is cash flow analysis with an example?

Cash flow analysis is a method of reviewing cash flow details for a business. An example maybe as simple as looking at the latest cash flow statement or require more complexcalculations, ratios, and comparisons.

What is the purpose of cash flow analysis?

Cash flow analysis helps business owners, managers, executives, lenders, and shareholdersunderstand if a company is generating cash or using cash, and the breakdown of where thosecash movements are happening in the company.

How do you analyze cash flow?

Cash flow analysis typically begins with the statement of cash flows, which breaks down cashflows into sections for operating, financing, and investing activities. Analysis includeslooking for trends, areas of strong performance, cash flow problems, and opportunities forimprovement.

What is cash flow software?

Cash flow software is software that helps calculate and analyze cash flow. Bookkeepingsoftware, accounting software, and ERP software typically include cash flow software modulesor components.

What is a cash flow analysis?

Cash flow analysis is a review of business cash flows with a goal of finding trends oropportunities that allow for improved business decisions and improved long-term growth andsustainability.

What tools do you currently use to manage cash flows?

Most business leaders looking to manage cash flows use their ERP or accounting software as akey tool, such as Oracle NetSuite. They may also use spreadsheet software to complementanalysis and research.

Performing a Cash Flow Check-Up (2024)


Performing a Cash Flow Check-Up? ›

One can conduct a basic cash flow analysis by examining the cash flow statement, determining whether there is net negative or positive cash flow, pinpointing how the outflows compare to inflows, and draw conclusions from that.

What is cash flow assessment? ›

Cash flow analysis helps you understand if a business's healthy bank account balance is from sales, debt, or other financing. This type of analysis may uncover unexpected problems, or it may show a healthy operating cash flow.

What is an example of cash flow analysis? ›

Let's say a company called Red Bikes has just opened and earned a net income of $75,000 to start and generated additional cash inflows of $95,000. Cash outflows (expenses like rent and payroll) totaled $25,925. This leaves an ending cash balance of $144,075.

How do you describe cash flow performance? ›

It indicates how much cash your business has generated or used in that period. A positive net cash flow means that your business has more cash coming in than going out, while a negative net cash flow means the opposite.

What is the best way to monitor cash flow? ›

Tips for Monitoring Cash Flow

Track Cash Inflows: Regularly monitor and record all sources of cash inflow, including sales revenue, loans, and investments. Use accounting software or spreadsheets to keep accurate records and categorize your income sources.

What are the three basic types of cash flow activities? ›

The three categories of cash flows are operating activities, investing activities, and financing activities. Operating activities include cash activities related to net income. Investing activities include cash activities related to noncurrent assets.

How to prepare a cash flow? ›

Four steps to a simple cash flow forecast
  1. Decide how far out you want to plan for. Cash flow planning can cover anything from a few weeks to many months. ...
  2. List all your income. For each week or month in your cash flow forecast, list all the cash you've got coming in. ...
  3. List all your outgoings. ...
  4. Work out your running cash flow.

What are examples of cash flow problems? ›

Cash-flow problems - Key takeaways

Cash flow problems are when the net cash flow in a business is negative. The effects of cash flow problems may include late or unpaid debts, an inability to pay suppliers or staff wages, and an inability to buy inventory.

What is a cash flow report? ›

A cash flow statement is a financial statement that provides aggregate data regarding all cash inflows that a company receives from its ongoing operations and external investment sources. It also includes all cash outflows that pay for business activities and investments during a given period.

What is an example of a real cash flow? ›

Real cash flow enables businesses to make well-informed comparisons of their revenue streams over time. For instance, if a business earned $1 million in revenue in 1993, that $1 million in 1993 dollars would be equivalent to $1.6 million in 2013 dollars.

What does a positive cash flow look like? ›

At its most basic, positive cash flow is when cash inflows are higher than cash outflows in a given period. Essentially, this means that more cash is coming into your business than going out of your business.

What does a strong cash flow look like? ›

If a business's cash acquired exceeds its cash spent, it has a positive cash flow. In other words, positive cash flow means more cash is coming in than going out, which is essential for a business to sustain long-term growth.

What is the most important cash flow measure? ›

Free cash flow (FCF) is one of the most common ways of measuring cash flow. This metric tracks the amount of cash you have left over after capital expenditure items like equipment and mortgage payments.

What are the common measures of cash flow? ›

Free cash flow

Generally speaking, FCF is the flow of money through the business, minus capital expenditures (equipment, mortgages, etc.). It's a straightforward calculation: take earnings before interest and tax (EBIT) and then subtract capital and related expenditures.

Why is it important to monitor cash flow? ›

To avoid running out of money

This is perhaps the most important reason why you need to keep an eye on cash flow. If a business does not have enough cash on hand to meet its expenses, it could be forced to close its doors. This is especially true for small businesses, which often have limited access to financing.

What is the purpose of a cash flow analysis? ›

The benefit of a cash-flow analysis is that it enables a company to assess its profits and liquidity. It allows you to see where the money is coming in and going out, so you can make sure there is enough cash to cover expenses and generate a profit.

How to calculate cash flow for a rental property? ›

For example, if your rental property has a 15% vacancy rate (out of $36,000 gross rental income), that is $5,400 you missed out on because of tenant turnover. Gross cash flow: To find the gross cash flow, use the simple formula gross rental income + additional income – vacancy rate.

What is an example of a cash flow? ›

What is a cash flow example? Examples of cash flow include: receiving payments from customers for goods or services, paying employees' wages, investing in new equipment or property, taking out a loan, and receiving dividends from investments.

What is a good cash flow ratio? ›

A high number, greater than one, indicates that a company has generated more cash in a period than what is needed to pay off its current liabilities. An operating cash flow ratio of less than one indicates the opposite—the firm has not generated enough cash to cover its current liabilities.

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