Cash flow analysis

Cash flow analysis is the evaluation of a company’s cash inflows and outflows from operating, financing and investing activities.

It shows how the company is generating its money, where it is coming from, and what it means about the overall value of the company.

Cash flow analysis should be done at least once a month to ensure your company has a healthy cash budget. For, a small business owner, performing a cash flow analysis regularly is essential for success. After all, running short of cash is one of the most common causes of small business failure. The good news: regular analysis of your cash flow can help you avoid this pitfall and manage your business more effectively.


Monitoring cash flow is key to a healthy business. A cash flow statement is a deep dive into your business’s financial health and is a way to inspect your cash flow in and out throughout a given period of time.

It can help you better understand where your money is going and how much cash you have at any given time.


Creating a cash flow statement is a great first step, but if you don’t know how to read or analyze it, it is not incredibly useful. A cash flow analysis gives you a well-rounded picture of your business’s financial health. Just as keeping an eye on your personal checkbook balance tells you whether you can afford certain personal expenses.

Regularly analyzing your business cash flow will tell you whether you’ll be able to make payroll, pay your suppliers, and buy the materials to fulfill orders, or carry out expansion plans.

If your cash flow statement shows you are running short of cash to meet expenses, you can plan ways to cut costs, obtain short term financing, or take steps to accelerate income. If your cash flow analysis shows you have extra cash on hand, consider whether to invest it in new equipment or save for future slow periods.


The first step of cash flow analysis is, of course, creating a cash flow statement.

Start creating a cash flow statement by taking your company’s total cash balance at the beginning of the chosen time period and entering it into your spreadsheet.

Next, fill in the blanks by adding cash inflows (money coming in) and outflows (money going out) in three categories: operating activities, investment activities, and financing activities. Inflows are to be marked as positive (+) and outflows are to be marked as negative (-).

  1. Operating activities: operating inflows include money received from sales/paid receivables. Operating outflow includes money paid to suppliers, employee payroll, any taxes not related to investing or financing and depreciation or amortization of business assets.

  2. Investing activities: money spent on purchasing assets should be marked as outflow; money gained from selling or renting them out is considered inflow.

  3. Financing activities: getting a loan for business would be recorded as an inflow; however each payment made on the loan would be recorded as outflow.

Once all the relevant transactions on the cash flow statement are recorded add everything up to arrive at the closing balance (the amount left at the end of the cash flow statement period). If the closing balance is higher than the opening balance than the cash flow is positive. If it is lower than the cash flow is negative.

By examining the cash flow statement a company can figure out possible ways to remedy the problem. To cover the shortfall, they can either cut the costs or increase income.

Read next: Fund Flow Analysis, Financial Statement Analysis

#CashFlowStatement #HowtoconductaCashflowanalysis #ImportanceofCashflowanalysis

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