How to Perform a Cash Flow Analysis for Your Business

How to Perform a Cash Flow Analysis for Your Business

12:55 01 August in Blog

Cash flow is the lifeblood for any business. It is needed to sustain operations, meet financial obligations, pay employees, maintain adequate inventory levels, and enable growth.  Generally, revenues and profits will not coincide with cash inflows and outflows meaning that a business can be profitable; however, without sufficient cash flow, it may not survive.  It is essential for business owners to understand this concept and to also pay close attention to the timing of cash inflows and outflows if they want to avoid cash flow problems or even worse, a business failure. Being able to recognize a problem before it’s too late is key. 

Analysis of Business Cash Flows

The method for examining the cash inflows (sources) and outflows (uses) for a business over a specified period of time is known as “cash flow analysis.”  Performing a cash flow analysis allows a business to put their cash flow statement under a microscope to identify the movement of cash in and out of the business. 

Through it, cash inflows and outflows can be broken down into measurable pieces that can be tracked and used to understand where cash is going and how much the business has at a given moment.  

Other benefits of performing a cash flow analysis are as follows: 

  • Provides insight on the financial health of the business and the business’s ability to generate cash, meet its financial obligations, and its need for external financing
  • Assesses working capital and liquidity for the business
  • Provides early warning if a business is headed for a cash flow problem so that the business owner can proactively take the necessary steps to avoid the problem
  • Will quickly identify if a cash flow problem is due to cash inflows, outflows, or both
  • Enables the business owner to model different scenarios and see how the effects of business decisions and policy changes made today will impact their future cash flow when used with a cash flow projection 
  • Aids in financial planning and preparing for future periods and even downturns in sales as well as shifting economic conditions 

Cash flow problems can quickly spiral out of control so business owners need to be proactive in managing cash flow, not reactive. 

Developing a Cash Flow Analysis

The following steps can be used to develop a cash flow analysis:

  1. Identify all sources of income (cash inflows) – If cash inflow is less than expected, steps may need to be taken to boost it, such as: increase collection efforts, offer cash discounts for early payment, reduce payment terms, and accept credit cards and other forms of electronic payments. Shorter payment terms may offer more value than extended ones as delayed payments may generate more costs in the form of interest, fees, or lost opportunities.
  2. Identify all business expenditures (cash outflows) – If cash outflows are more than forecast, the business may need to reduce expenses and inventory purchases, negotiate longer terms with suppliers, and try to take advantage of cash discounts for early payment.
  3. Prepare a cash flow statement – After identifying business income and expenditures, the information can then be organized into a cash flow statement.  Typically, it will have three sections including operating activities, investing activities, and financing activities. To perform a cash flow analysis, at the very minimum a cash flow statement will need to include operating activities. Cash flow projections may also be used.  To do this, a monthly (or weekly) sales forecast must be created along with a profit and loss forecast.  The sales forecast should identify projected incoming cash flows from accounts receivable as well as other sources and identify the timing when actual funds are released for expenditures.
  4. Analyze and interpret the cash flow statement – Once the cash flow statement or cash flow projection are prepared, the business will be able to determine where money flows in a given period of time. The business should aim for positive cash flows from operations during each period and analyze periods of negative cash flows.  If there are consistently periods of negative cash flow, it is bad for business and revisions should be made. When the cash balance is negative or decreasing, the business may need to decide the appropriate form of external financing or business funding to close the deficit.  If the cash balance is positive/ consistently increasing, then perhaps it’s time to reinvest money into the business or set aside funds to build up cash reserves that can be used during economically slow periods.Keeping tabs on cash inflows from accounts receivable is important as the business will be able to determine if they have the appropriate billing and collection procedures in place.

Performing a cash flow analysis can help businesses stay ahead of the curve on cash flow management and avoid cash flow problems especially during periods of cash crunches or if the business is affected by seasonality. It provides early warning of cash inflow shortfalls and greater than anticipated cash outflows so that proper steps can be taken. 

Closing the Gap through Invoice Factoring

New, small, or struggling businesses may lack the credit or the time to apply for bank loans or other traditional financing.  Rather than turn away opportunities for growth because of a simple lack of cash or credit, businesses should consider invoice factoring as a simple, fast, and reliable alternative funding option.   

Invoice factoring can close serious deficits in cash flow and allows the business owner to continue operations without worrying about covering expenses.  It provides the business with consistent cash flow when needed and allows them to keep less cash on hand at any given time.

Unlike most kinds of traditional business financing, invoice factoring does not involve a loan. When an invoice is factored, the business will transfer ownership of their invoices for accepted and completed work in exchange for an agreed-upon advance, as a percentage of the invoice.  

It’s faster and easier to obtain than bank loans, and approval is based primarily on the financial strength of the client’s customers, not the client’s credit profile. This kind of business funding gives companies the cash flow they need to focus on their current operations and relieves concerns over cash flow deficits.

Not all accounts receivable factoring options are alike, however. Every business is unique with its challenges, and each deserves an individualized approach to solving their cash flow shortfalls. 

With flexible factoring structures, Capstone will customize a program specific to the business that will help them achieve their financial goals.

Download: Infrastructure Investment & Jobs Act – Contract Opportunities and Funding Analysis

Capstone wants your business to take full advantage of the opportunities (or use projects) available through the Infrastructure Investment & Jobs Act recently signed into law.


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