AMB Performance Group Blog

How to Do a Cash Flow Analysis

Posted on: December 17, 2021
Building a Sellable Business

How healthy is your company when it comes to financials? If you’re not sure, it may help to learn how to do a cash flow analysis. After all, understanding your company’s financial health is key to presenting an overall picture of what’s working and what’s not within your business, and knowing how to do a cash flow analysis may mean keeping some problems at bay, like struggling to pay vendors and staff.

What is a Cash Flow Analysis?

In the process of building a cash flow analysis, you’ll be looking at the transactions within your company that hit your cash reserves the hardest and those trends that can predict an upcoming potential cash flow issue. This can either be on a small or large scale. On a small scale, you’re simply going to record those changes so you know whether your bank balance is increasing or decreasing. If you like, you can break those transactions that mean you’re spending on day-to-day management of your business, those that mean you’re investing in key areas, and you’re financing your business like paying off debt or paying the fees to cover a new loan. Gathering and documenting that data means you can find the trends so that you can predict future cash flow problems and do what you can to improve the overall financial health of your company. If you haven’t yet, it’s time to consider doing a cash flow analysis.

Making It Happen

So, how do you do a cash flow analysis? Begin with your cash flow statements. If your accounting is a little rusty, then basic business accounting software can design this kind of document for you. From there, you’ll want to break that statement out into various categories. You can use as many categories as you’d like, but at the minimum, you should break it down into operating transactions, investment transactions, and financing transactions. Then, all you have to do is start tracking each transaction that changes your company’s cash position. Keep in mind, though, that a transaction only counts if money is going out or coming into your business. If, for example, you make a sale but you don’t actually collect the payment yet, you don’t want to put it on your statement. Unless it’s under accounts receivable. Once a month, you should review that statement, then begin looking for trends so that you know when a cash flow shortage is coming, or a rush of sales might be coming.

Avoiding Potential Problems

Just performing a cash flow analysis doesn’t mean you won’t run into at least a few problems. If you allow your analysis to sit unused, for example, you may not really benefit from it. You should update things at least once each month to help understand what’s working and what’s not in your business. It may also be helpful to further break your analysis down into smaller categories. If you’re increasing cash on hand because your normal sales volume is unusually high, your business is probably growing healthily. If, though, an abundance of cash came from selling a key asset, you may not be able to count on that happening again in the near future, and you need to take that into account when doing projections.

A Healthier Business

Now that you’ve learned how to do a cash flow analysis, and you have your report in hand, you can make more accurate projections in order to grow your business in a healthier way. Of course, the aim is to have a positive cash flow most of the time, but be willing to take the necessary risks to make your business stronger, even if it means a negative cash flow at times. Investments are necessary to generate a stronger cash flow down the line.

Reach out to us today if you need a business health check! You could benefit from our services in ways you could never imagine.

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