A cash flow analysis is a simple examination of your business’ finances that should be performed on a regular basis. This financial planning tool examines the money that comes in and out of your business over a specific period of time. It is a study of how your company generates its revenue, where the money is coming from and how it relates to the overall value of your business.

Why is a Cash Flow Analysis Important?

A cash flow analysis offers a comprehensive picture of your company’s financial health. It will tell you vital information like whether your company is low on cash or running a surplus. This insight can help you to plan out necessary adjustments, such as cutting costs, obtaining financing or hiring new employees.

Since your business’ finances can vary greatly from month to month, you should regularly perform a cash flow analysis to keep on top of any financial issues.

How to Perform an Analysis

You can start a cash flow statement by entering your company’s total cash balance at the beginning of a given time period into a spreadsheet. For this figure you can input the cash balance from your business’ balance sheet. Next, fill in your cash inflows and outflows in three categories: operating activities, investment activities and financing activities.

• Mark inflows (money coming in) as a positive (+)
• Mark outflows (money going out) as a negative (-)

Operating Activities

This is typically the main source of your company’s cash generation.

• Inflows are generally the money you receive from the sale of products or services.
• Outflows may include money paid to suppliers, employees and any taxes not related to investing or financing.

Investment Activities

These business activities refer to the purchase or sale of assets that do not relate to the day-to-day operations of your business.

Financing Activities

The financing category includes items like the issuance of stock, business loan payments or the distribution of dividends. For example, a small business line of credit may be an inflow, but its payments would be an outflow.

Next, you can begin your analysis by filling in these categories for your starting and ending date. Totaling these figures will give you a closing balance for your cash flow statement period.

If the closing balance exceeds the opening balance, your business has created a positive cash flow. If it does not, your company is running at a deficit.

This most basic type of financial analysis is practiced regularly by businesses across the country, because it gives a quick snapshot of a company’s financial health. If you have any additional questions about the cash flow analysis process or any other financial topics, contact your local tax preparer.