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How to develop cash flow analysis

December 28, 2013
Read Time: 0 min

There’s nothing quite like cash. It is necessary to start, maintain and grow business operations. However, many small business owners struggle with managing and sustaining their cash reserves. Flawed cash flow analysis or insufficient capital can drastically and negatively affect daily business operations, as well as loan eligibility.

Cash flow, put simply, is the migration of capital in and out of a business. It is comprised of two variables: inflow and outflow. Inflow is capital that is received as a result of normal business transactions. This can include sales of goods and services, loans, lines of credit and asset sales. Outflow is capital leaving the business, and can result from business expenditures, loan payments and business purchases.

The ability to maintain these two variables so sufficient cash reserves are held at all times is critical for small businesses. Developing a reliable cash flow system will help to manage these variables so that there are no unexpected surprises that can result in a cash deficit.

Income statements and profit and loss records can be used to make approximations for future cash flow orientation. However, a cash flow statement can serve another, independent purpose. They can incorporate into their calculations non-cash items and expenses to adjust profit figures. Not only do cash flow statements display changes over time, they also document total cash reserves.

For the most part, cash flow analysis is comprised of three components:

Financing Activities: Financing activities are cash flow trends related to funding the business. Taking out a loan or a line of credit, for example, would be considered business inflow. The payment on the loan would be considered outflow, and both would be documented in the financing activities portion of the cash flow statement.

Investment Activities: The investment activities portion of the cash flow analysis statement documents all incomes and expenditures resulting from long term investment purchases and sales. This includes property, assets, equipment and securities. For example, if a construction company purchases a new bulldozer this would be considered an investment activity and would be recorded as a cash outflow. If, after several years, the company decides to sell the bulldozer, it would be considered a cash inflow.

Operating Activities: Operating activities considers net income and losses. By analyzing sales and business expenditures, non-cash items are adjusted to incorporate inflows and outflows of cash transactions.

Calculating cash flow statements and analysis can be a difficult task, particularly for a new small business. Seek out the advice of an accounting professional or trusted business advisor, or consider 3rd party software that can help make these calculations easier.

For more information on why cash flow forecasts are important, including recommendations for more accurate projections, download the whitepaper: Avoid Cash Flow Catastrophes.

About the Author


Raleigh, N.C.-based Sageworks, a leading provider of lending, credit risk, and portfolio risk software that enables banks and credit unions to efficiently grow and improve the borrower experience, was founded in 1998. Using its platform, Sageworks analyzed over 11.5 million loans, aggregated the corresponding loan data, and created the largest

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