Why you should be doing cash flow analysis

Cash flow is the lifeblood of any business, making cash flow analysis essential for gaining valuable insights into your liquidity, operational efficiency, and long-term viability.

By closely monitoring cash inflows and outflows, you can better understand your ability to cover day-to-day operations financially, reinvest in growth, and cope with market fluctuations.

Unlike static financial snapshots, cash flow analysis can give you a dynamic view of financial health over time.

It helps you identify trends, anticipate potential cash shortages, and adapt to changing market conditions.

Accurate cash flow forecasting can power informed strategic decisions, improve financial performance, and support sustainable growth.

We’ll explore why cash flow analysis is a critical component of financial reporting, how it enhances decision-making, and how you can use it to anticipate future cash needs and drive business success.

Here’s what we’ll cover

What is cash flow? And how does it differ from profit?

The term “cash flow” refers to the inflows and outflows of cash within your business during a period—such as a quarter or a fiscal year.

It’s important to note that cash flow differs from profit, which is your financial gain after all expenses are deducted from revenue.

While cash flow shows how much money is available to cover immediate expenses, profit reflects long-term financial success.

Your business can be profitable but still struggle if your cash flow is poor, meaning there isn’t enough cash on hand to pay your bills or employees.

Both profit and cash flow are crucial for assessing financial health.

What is cash flow analysis?

Cash flow analysis involves assessing the timing of cash movements, how much is transferred in and out, and making predictions for future cash movements.

Understanding cash flow should be one of the main objectives of your financial reporting.

You’ll want to see liquidity and flexibility.

Positive cash movement indicates that your company’s liquid assets have increased, meaning you can cover day-to-day operations, pay creditors, reinvest, and maintain a buffer for future challenges.

Why cash flow analysis is essential for a healthy business

Cash flow analysis provides vital information on your company’s financial health.

It tells you where your cash inflows are coming from—whether sales, loans, or investors—and where you spend your money.

A continuous negative cash flow means you’ll face challenges, and even being able to operate will be an ongoing concern.

Cash flow forecasting allows you to anticipate cash flow issues and make the necessary adjustments to remain financially healthy.

Cash flow analysis as a strategic tool

If you consider the bigger picture, analyzing cash can support you strategically with growth initiatives, risk management, and capital allocation.

A clear understanding of cash flow can shape your investment decisions, help you grow sustainably, and ensure your business is agile.

An example of using cash flow analysis as a strategic tool

Imagine you’re looking at your company’s cash flow analysis and noticing a steady surplus of cash from operations over the past several quarters.

With this positive cash flow, you decide it’s the right time to invest in upgrading your company’s equipment, which will improve production efficiency.

Doing this ensures your business can grow sustainably while maintaining the liquidity needed to cover ongoing operational costs.

Your decision to invest, guided by cash flow insights, positions your company to stay agile and competitive in the market

Cash flow analysis can help you with risk management and forecasting

You can use cash flow forecasts to anticipate liquidity needs, manage debt obligations, and prepare for market downturns.

A proactive approach will help safeguard your business from potential cash shortfalls and ensure continuity during difficult periods.

An example of using cash flow analysis to help you with risk management and forecasting

Imagine you’re looking at your company’s cash flow forecast and see a potential cash shortfall in the coming months due to seasonal dips in sales.

To manage the risk, you secure a short-term line of credit to cover operating expenses during this period.

This proactive approach ensures your business can maintain liquidity, manage debt obligations, and continue operations smoothly despite the downturn.

Forecasting cash flow effectively safeguards your business from financial strain and prepares you for future challenges.

Cash flow reporting

Sometimes, you might need to report to boards, investors, and other stakeholders. Accurate cash flow analysis helps you communicate your company’s financial health transparently and effectively.

It helps you build a data argument to communicate your company’s financial health to stakeholders.

Clear visibility into cash movements allows for better investor transparency, improving confidence and boosting informed decision-making across the business.

An example of using cash flow reporting

Imagine you’re preparing for a quarterly meeting with the board of directors and key investors.

You clearly illustrate how the company’s positive cash flow supports ongoing operations and future investments using detailed cash flow reports.

This transparency reassures the board and investors that the business is financially healthy and well-positioned for growth.

The precise data boosts investor confidence, encourages informed decision-making, and reinforces trust in the company’s long-term strategy.

What is the cash flow statement?

Your cash flow statement is one of the 3 primary financial statements, typically used alongside the balance sheet and the profit and loss statement (also known as the income statement).

A cash flow statement focuses on cash movements, showing how much cash was spent or received during a period.

Top tip

Your cash flow statement provides essential contextual information you won’t receive from other financial statements, such as the sources and uses of cash.

What are the 3 types of cash flow in a company?

1. Cash flow from operating activities: shows cash movements from your core business operations, including cash generated from sales and cash paid for running the business.
2. Cash flow from investing activities: describes cash spent on growing the business, such as purchasing assets or receiving cash from selling investments.
3. Cash flow from financing activities: reflects cash used to fund the business, including loans, dividends, and other borrowed funds.

Step-by-step cash flow analysis

Performing cash flow analysis can empower you to make better financial decisions. Here are 5 steps to conduct a thorough cash flow analysis:

1. Gather financial statements: collect relevant financial documents such as income statements, balance sheets, and cash flow statements.
2. Analyze operating cash flow: review revenues and expenses from core business operations to assess your company’s daily impact on cash flow.
3. Review investment and financing activities: evaluate how investment and funding decisions have affected your company’s cash position.
4. Make adjustments: adjust for non-cash transactions like depreciation and consider changes in working capital, such as accounts payable and receivable.
5. Compare and make decisions: compare cash flow across different periods to spot trends and make informed financial decisions.

How to do a cash flow analysis example

Let’s walk through an example of cash flow analysis.

Example: A basic cash flow analysis for your business (January – June)

Let’s say you analyze your cash flow for the year’s first half.

1. Cash inflows:

• January: $10,000 (sales revenue)
• February: $15,000 (sales + loan)
• March: $12,000 (sales)
• April: $20,000 (sales)
• May: $25,000 (sales + investor funding)
• June: $18,000 (sales)

2. Cash outflows:

• January: $5,000 (operating expenses)
• February: $10,000 (expenses + loan repayment)
• March: $8,000 (operating expenses)
• April: $12,000 (equipment purchase)
• May: $15,000 (advertising, employee salaries)
• June: $10,000 (expenses)

3. Net Cash Flow:

• January: $5,000 (positive)
• February: $5,000 (positive)
• March: $4,000 (positive)
• April: $8,000 (positive)
• May: $10,000 (positive)
• June: $8,000 (positive)

Analysis

Your business has maintained a positive cash flow throughout the period, which shows you’re managing your cash effectively.

The large outflows in April and May were growth investments (equipment purchase and advertising), but your company had enough inflows to sustain these expenditures.

With this analysis, you can understand your liquidity, support your day-to-day operations, and be confident with your strategic decisions, such as reinvesting for growth.

How to automate cash flow analysis

Relying on manual methods for cash flow analysis could be time-consuming and prone to errors.

Financial technology (such as Sage Intacct) can automate processes, significantly boosting accuracy and reducing risk.

Automation streamlines tasks such as data consolidation, report generation, and forecasting, freeing up your finance team to focus on more strategic efforts.

Speed and efficiency

Financial technology automates the repetitive tasks associated with cash flow analysis—such as data entry, report generation, and forecasting.

You can eliminate manual errors and reduce the time spent on these tasks, allowing your finance team to focus on more strategic activities.

Top tip

Instead of manually compiling financial data from multiple sources, consolidate everything into one platform, which will save time and provide real-time insights.

Real-time data for proactive decision-making

Real-time visibility into cash movements can help you make proactive decisions.

This immediacy allows you to respond to cash flow challenges or opportunities as they arise rather than waiting for period-end reports to act.

Top tip

A live data alert could help you swiftly adjust expenses or investments to maintain liquidity if you notice a sudden cash shortfall.

Accuracy and reduced risk

Manual cash flow analysis can be error-prone, especially when dealing with extensive data.

Financial management software can automate calculations and ensure the accuracy of your cash flow reports.

This could be crucial if you want to keep up investor confidence by avoiding financial missteps.

Top tip

Automating complex calculations and forecasting models minimizes the risk of errors that could lead to costly financial decisions.

Advanced forecasting and scenario planning

Financial technology lets you easily model various financial scenarios, helping you prepare for the future.

Advanced forecasting capabilities can help you project cash flow based on different scenarios, such as changes in sales or unexpected expenses.

This could help you make better investment, growth, and risk management decisions.

Top tip

Run through “what-if” scenarios—such as a drop in sales or a significant capital investment—and instantly see how these changes would impact cash flow.

Final thoughts

Cash flow analysis is a vital part of your business’s financial toolkit. Ensure that it is a regular part of your financial management process and consider using automation tools to simplify and improve accuracy.

Understanding your cash movements, forecasting future needs, and making strategic adjustments will help keep the business financially healthy and growing sustainably.

Remember: as your business grows, managing cash flow becomes more complex.

Look at financial technology that scales with your business, offering flexibility to manage increasing volumes of transactions and more sophisticated financial structures without requiring additional manual work.

Top tip

Find technology that can handle the complexity of multi-entity cash flow analysis, giving you the tools to manage your expanding operations without increasing your administrative overhead.

In business, the journey to financial self-improvement is about consistent progress, not perfection—and every step forward brings you closer to your goals.

Editor’s note: this article was originally published in July 2023 and has been updated for relevance