{"id":1341,"date":"2020-05-01T14:41:43","date_gmt":"2020-05-01T19:41:43","guid":{"rendered":"https:\/\/northone.com\/blog\/?p=1341"},"modified":"2023-05-16T11:30:10","modified_gmt":"2023-05-16T16:30:10","slug":"master-cash-flow-analysis","status":"publish","type":"post","link":"https:\/\/www.northone.com\/blog\/financial-management\/master-cash-flow-analysis","title":{"rendered":"How to Master Cash Flow Analysis for Your Business"},"content":{"rendered":"\n

Don\u2019t be fooled by the fancy business lingo, a cash flow analysis is much simpler than it sounds. Basically, this is simply the process of taking the time to look into where your cash is coming from and where it is going out of your business, making adjustments based on these findings. When you analyze your cash flow regularly, it can make a big difference to your small business. In this article, we\u2019ll dive into how to perform a cash flow analysis and why it\u2019s important to the financial health of your business. <\/p>\n\n\n\n

<\/span>What is Cash Flow Analysis? <\/strong><\/span><\/h2>\n\n\n\n

A cash flow analysis refers to how money \u2018flows\u2019 in and out of your business during a predetermined time. This activity seeks to find the answer to questions like \u2018where is the money coming from?\u2019  \u2018when does my business typically have extra cash flow?\u2019 and \u2018when is money tight?\u2019. <\/p>\n\n\n\n

The goal is for you as a business owner to get a better understanding of how much cash you have at any given time. This will put you in a better position to make educated financial decisions. 
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<\/span>Why Do You Need Cash Flow Analysis?<\/strong><\/span><\/h2>\n\n\n\n

A cash flow analysis is something every small business<\/a> should do routinely. This activity helps you keep a pulse on your finances, so you can look after your business\u2019 financial health. <\/a><\/p>\n\n\n\n

A cash flow analysis will tell you whether you\u2019ll be able to make payroll, pay your suppliers, buy materials and make expansions on your business. <\/p>\n\n\n\n

Cash flow<\/a> is the key ingredient in what makes a business run smoothly. This is something you should never leave up to chance after all running short of cash is one of the most common ways that businesses fail. <\/p>\n\n\n\n

By regularly managing your cash flow and performing cash flow analyses you can avoid this common pitfall. <\/p>\n\n\n\n

The following are a list of ways a cash flow analysis can help you better manage your business:<\/p>\n\n\n\n

<\/span>Provides Insight into Operations<\/strong><\/span><\/h4>\n\n\n\n

A cash flow analysis will give you a well-rounded picture of how your business is successfully or unsuccessfully operating. Basically, by analyzing your cash flow you can figure out whether things are working or if you need to make some changes to make your business more profitable.  <\/p>\n\n\n\n

One key point you’ll want to examine when undertaking a cash flow analysis is where your money is going. For example, if your analysis shows that a significant percentage of your cash flow is tied up in overdue or late payments from customers, you may want to revise how you collect payments to free up some of this money. <\/p>\n\n\n\n

By getting a better understanding of your cash flow you\u2019ll also be able to make more educated decisions when it comes to achieving your short and long term financial goals. If you are a restaurant wanting to invest in a new oven, you\u2019ll want to examine cashflow to see when this is possible without cutting into other expenses. An example of a more long term goal is that you might want to progressively grow your team over time, if your analyses are showing a steady increase in cash flow, you can justifiably plan to add someone new to your payroll. <\/p>\n\n\n\n

<\/span>Keep a Thumb on External Tools<\/strong><\/span><\/h4>\n\n\n\n

If you outsource functions that are vital to your business\u2019s operations, a cash flow analysis can help you keep track of how much money you are allotting for each role. Being aware of how much you\u2019re spending can help you understand if you\u2019re getting a reasonable return on your investment. <\/p>\n\n\n\n

For example, you might have hired a marketing company to help your business grow. A regular cash flow analysis will demonstrate whether this marketing company is bringing in enough new business to warrant the spend. <\/p>\n\n\n\n

On a smaller scale, you may have invested in a handful of business management tools, like payroll platforms and accounting software. A cash flow analysis will help you keep track of how much you are spending on these tools and might prompt you to look into alternative, more cost-effective options. <\/p>\n\n\n\n

North One can help you better manage external business tools by allowing you to seamlessly integrate your financial reporting with third parties like bookkeepers and accountants.\u00a0<\/a><\/p>\n\n\n\n

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<\/span>Offers Documentation for Financial Assistance<\/strong><\/span><\/h4>\n\n\n\n

Performing a regular cash flow analysis of your business not only helps you stay on top of your finances but can also help to ensure your finances are organized and transparent. This is particularly important if at any point your business needs additional outside assistance. <\/p>\n\n\n\n

Take the current pandemic as an example. Many businesses have suffered due to the COVID-19 outbreak and are seeking financial assistance through government relief programs. To be eligible for these programs businesses need to provide proof of cash flow to demonstrate how the crisis has affected business.  Some examples of these programs include the Paycheck Protection Program and Self Employment Assistance Program. The SBA also has a variety of loan opportunities set up to provide support to businesses during this difficult time.<\/a> To be eligible for any of this financial assistance, you will need to provide proof of cash flow. <\/p>\n\n\n\n

<\/span>How to Do A Cash Flow Analysis<\/strong><\/span><\/h2>\n\n\n\n

Now that we\u2019ve explored what your business can get out of performing regular cash flow analyses, let\u2019s break down how you actually do it. 
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<\/span>Prepare your Cash Flow Statement<\/strong><\/span><\/h3>\n\n\n\n

A cash flow analysis starts with a \u2018cash flow statement\u2019. This statement combines your balance sheets and your income to determine how well your company is managing financially. A cash flow statement or CFS is a measure of strength, profitability and of long term future outlook for the company. Once you\u2019ve put together a CFS you\u2019ll be able to further analyze these results and see where changes can be made to improve your business, or where there might be an opportunity to grow. <\/p>\n\n\n\n

<\/span>Add in Cash Inflows and Outflows<\/strong><\/span><\/h4>\n\n\n\n

Fill in the cash flow statement with where the money is coming in (inflow) and where it is leaving the business (outflow). You can organise this statement into three categories: operating activities, investment activities, and financing activities. <\/p>\n\n\n\n

There are plenty of cash flow statement templates available. If you want to create your own, be sure to include the following: <\/p>\n\n\n\n

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  1. Cash from operating activities<\/li>\n<\/ol>\n\n\n\n