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

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

What Is Cash Flow Analysis?

There are three cash flow types that companies should track and analyse to determine the liquidity and solvency of the business: cash flow from operating activities, cash flow from investing activities and cash flow from financing activities. All three are included on a company’s cash flow statement.

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

Depending on the type of cash flow, bringing in money in isn’t necessarily a good thing. 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 used during a specific accounting period.
  • Understanding cash sources and where your cash is going is essential for maintaining a financially sustainable business.
  • A business may be profitable and still experience negative cash flow or lose money and experience positive cash flow.
  • Complementary measurements, such as free cash flow and unlevered free cash flow, offer unique 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 period of 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 common financial 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. It tells you if cash inflows are coming from sales, loans, or investors, and similar information about outflows. Most businesses can sustain a temporary period of negative cash flows, but can’t sustain negative cash flows long-term.

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

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. But you don’t know either way until you review 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 also useful to calculate different versions of cash flow to give you additional insights. For example, free cash flow excludes non-cash expenses and interest payments and adds in changes in working capital, which gives you a clearer view of operating cash flows. Unlevered free cash flow shows you cash flow before financial obligations while levered free cash flow explains 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 planning and preparing for future quarters, years, and even a potential downturn in sales or economic conditions.

Why Is Cash Flow Analysis Important?

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

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

Cash Flow Analysis Basics

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

  • Cash from operating activities represents cash received from customers less the amount spent on operating expenses. In this bucket are annual, recurring expenses such as salaries, utilities, supplies and rent.
  • Investing activities reflect funds spent on fixed assets and financial instruments. These are long-term, or capital investments, and include property, assets in a plant or the purchase of stock or securities of another company.
  • Financing cash flow is funding that comes from a company’s owners, investors and creditors. It is classified as debt, equity and dividend transactions on the cash flow statement.

How Do You Perform Cash Flow Analysis?

To perform a cash flow analysis, you must first prepare operating, investing and financing cash flow statements. Generally, the finance team uses the company’s accounting software to generate these statements. Alternately, there are a number of free templates available. (opens in a new tab)

Preparing a Cash Flow Statement

Let’s first look at preparing the operating cash flow statement. The line items that are factored into the company’s net income and are included on the company’s operating 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 section of cash flow statements.

The Cash Flow Statement Direct Method takes all cash collections from operating activities and subtracts all of the cash disbursements from the operating activities to get the net income.

The Cash Flow Statement Indirect Method starts with net income and adds or deducts 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 is calculated by adding the money received from the sale of assets, paying back loans or selling 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, investors and creditors.

Cash Flow Analysis Example

Net income adjusted for non-cash items such as depreciation expenses and cash provided for operating assets and liabilities. Using a free public template from the Small Business Administration (SBA), let’s say Wild Bill’s Dog Trainers and Walkers had a net income of $100,000 to start and generated additional cash inflows of $220,000.

As you can see in the spreadsheet, it spent $41,000 on operating cash outflows like hiring an additional person, buying new equipment for the dog park, paying taxes and more. The owner paid some principal down on a loan and took a draw of $50,000 for an ending cash balance of $127,200. Small changes in any of those line items show the impact of hiring more people, paying more taxes, buying more equipment and more to ensure the business has a healthy balance sheet and doesn’t go “into the red.”

Wild Bill’s Dog Trainers and Walkers

[Month] [Month] [Month] [Month] [Month] [Month] Total
Beginning Cash Balance 100,000 $127,200
Cash Inflows (Income):
Accts. Rec. Collections 80,000 80,000
Loan Proceeds 20,000 20,000
Sales & Receipts 20,000 20,000
Other: 0
Total Cash Inflows $120,000 $0 $0 $0 $0 $0 $120,000
Available Cash Balance $220,000 $127,200
Cash Outflows (Expenses):
Advertising 100 100
Bank Service Charges 100 100
Credit Card Fees 500 500
Delivery 0 0
Health Insurance 4,000 4,000
Insurance 1,000 1,000
Interest 1,000 1,000
Inventory Purchases 5,000 5,000
Miscellaneous 300 300
Office 200 200
Payroll 8,000 8,000
Payroll Taxes 20,000 20,000
Professional Fees 100 100
Rent or Lease 1,000 1,000
Subscriptions & Dues 200 200
Supplies 100 100
Taxes & Licenses 100 100
Utilities & Telephone 100 100
Other: 0 0
Subtotal $41,800 $0 $0 $0 $0 $0 $41,800
Other Cash Out Flows:
Capital Purchases 0 0
Loan Principal 1,000 1,000
Owner’s Draw 50,000 50,000
Other: 0
Subtotal $51,000 $0 $0 $0 $0 $0 $51,000
Total Cash Outflows $92,800 $0 $0 $0 $0 $0 $92,800
Ending Cash Balance $127,200 $127,200

This automated form is made available compliments of CCH Business Owner’s Toolkit

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 about the health of the business.

  1. Aim for positive cash flow
    When operating income exceeds net income, it’s a strong indicator of a company’s ability to remain solvent and sustainably grow its operations.
  2. Be circumspect about positive cash flow
    On the other hand, positive investing cash flow and negative operating cash flow could signal problems. For example, it could indicate a company is selling off assets to pay its operating expenses, which is not always sustainable.
  3. Analyse your negative cash flow
    When it comes to investing cash flow analysis, negative cash flow isn’t necessarily a bad thing. It could mean the business is making investments in property and equipment to make more products. A positive operating cash flow and a negative investing cash flow could mean the company is making money and spending it to grow.
  4. Calculate your free cash flow
    What you have left after you pay for operating expenditures and capital expenditures is free cash flow. This can be used to pay down principal, interest, buy back stock or acquire another company.
  5. Operating cash flow margin builds trust
    The operating cash flow margin ratio measures cash from operating activities as a percentage of sales revenue in a given period. A positive margin demonstrates profitability, 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.

Analyse Cash Flow With Software

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

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

Small businesses and large enterprises alike should understand their cash flow and cash position with regular check-ins. NetSuite helps you achieve better results through automated reporting, machine learning and AI-driven analysis, and extensive financial analysis tools to 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 financial statements, including cash flow. A more detailed cash flow analysis — provided through 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 on a regular basis to ensure it’s on track to meet its short-term and long-term financial goals.

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

#1 Cloud

Free Product Tour (opens in a new tab)

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 may be as simple as looking at the latest cash flow statement or require more complex calculations, ratios, and comparisons.

What is the purpose of cash flow analysis?

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

How do you analyse cash flow?

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

What is cash flow software?

Cash flow software is software that helps calculate and analyse cash flow. Bookkeeping software, accounting software, and ERP software typically include cash flow software modules or components.

What is a cash flow analysis?

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

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 a key tool, such as Oracle NetSuite. They may also use spreadsheet software to complement analysis and research.