Cash Flow Analysis Techniques and Tips

Understanding Cash Flow Is Key to Business Success

Two of the financial statements that business firms prepare as part of their monthly accounting cycle are the income statement and statement of cash flows. The income statement shows a firm's profit or net income, while the statement of cash flows shows the firm's cash position.

A company's cash flow at any point in time is the difference between its cash available at the beginning of an accounting period and at the end. The cash includes loan proceeds, investment income, and the sale of assets, and goes out to pay for operating expenses, direct expenses, principal debt service, and the purchase of assets such as equipment. When you operate a small business, cash is king. You can be profitable on paper, but cash poor. If that is your position, you could be in danger of losing your business.

The seven sections below describe cash flow statements from various aspects. Click on the title of each section for an in-depth exploration of the topic. Read through all of the linked sections to find out how to do cash flow analysis in order to increase your company's cash flow. You'll be introduced to cash budgets and statements of cash flows and learn how to analyze them. This knowledge is key to properly analyzing and operating your business.

How to Do a Cash Flow Analysis

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Cash is the gasoline that makes your business run. A cash flow analysis is a method for checking up on your firm’s financial health. It is the study of the movement of cash through your business, also called a cash budget, to determine patterns of how you take in and pay out money. 

The Difference Between a Cash Budget and a Statement of Cash Flows

Keeping track of cash flow is essential for the survival of your small business. However, accountants sometimes speak about the cash budget and a more comprehensive statement of cash flows. See what they mean, and learn how they are different.

The First Step in Analyzing a Statement of Cash Flows

A business owner must look at the last two years of the firm's balance sheets and compare the differences between the two in order to develop ​the statement ​of cash flows.

With information from an income statement, such as profit or loss and depreciation, as well as the information from the comparative balance sheets, particularly how current assets and liabilities may have changed, you can develop your statement of cash flows.

Preparing and Analyzing a Statement of Cash Flows

Analyzing a statement of cash flows involves looking at the sources and uses of funds from the comparative balance sheets, which allows a company to better see its future cash needs.

Here is a line-by-line cash flow analysis of a standard, three-part statement of cash flows.

Calculate Your Company's Free Cash Flow

The free cash flow calculation is one of the most important results that a small business owner can take away from the analysis of the statement of cash flows.

Simply put, free cash flow is the cash that a company has left after it pays for any capital expenditures it makes, like a new plant or equipment. 

Free cash flow is the gold standard for your company's financial health. Add an analysis of your company's free cash flow to your cash flow analysis to make it stronger.

3 Free Cash Flow Calculations

Free cash flow is how much money your business has left over to use for other purposes after it has paid for capital expenditures, including buildings and equipment, and other expenses needed to sustain its ongoing operation.

There are three ways to calculate free cash flow, all leading to the same answer. Here are examples of all three ways.

Calculate Cash Flow Ratios for Your Company

Several financial ratios—including operating cash flow, price/cash flow, and cash flow margin—help business owners focus on cash flow.

Calculating these cash flow ratios for your company can give you information about your business's liquidity, solvency, and viability. Add these calculations to your cash flow analysis to strengthen it.