Realizing the Importance of Cash Flow Analysis

Do You Have a Cash Flow Problem?

Many early-stage companies become hyper-focused on metrics that drive revenue, such as sales and marketing.  Although these areas are important, cash flow is the lifeblood of a business and should be watched carefully, especially in the early days of a company. Failing to manage cash – or not performing regular cash flow analysis – can have a drastic impact on a business' trajectory. According to a U.S. Bank study, 82 percent of business failures are due to poor cash management.

Cash flow projections have two basic components, money coming in and money going out. Both are equally important, but it takes careful accounting and constant monitoring to make sense of it. Depending on the type of cash flow, bringing in money isn’t necessarily a good thing. And, spending money isn’t necessarily a terrible thing.  Making the sale doesn’t mean you have the money and incurring expenses doesn’t mean you paid for it already.

How Cash Flow Informs Business Decisions

Understanding cash sources and where cash is going is essential for maintaining a financially sustainable business and for making the right business decisions.

Most companies don’t realize that it’s a lot easier to spend money than to retain it. Being mindful of how and when cash is left in the form of expenditures is extremely critical. Being in the black doesn’t mean you can spend. Another area of heavy spending is when companies begin to grow. Growth is usually expensive because the faster a company grows, the more capital is required. This is the time to closely monitor, project, and maintain cash flow reporting.

In the case of many software as a service (SaaS) companies, customers’ payment is made at the beginning of the year. It can be very challenging to balance the monthly and quarterly cash burn to last through the end of the year. Maintaining accurate cash flow projections based on company goals can ensure that those goals are achieved but are also measured by the cash flow metric.

Related: Tips to improve your cash flow strategy

How to Conduct a Cash Flow Analysis

It all begins with a cash flow statement. A cash flow statement is a financial report that details how cash entered and left a business during a reporting period. It should include your monthly or yearly business income and expenses.

Feel free to use our cash flow statement template, we even walk users through how to use it. Our cash flow template is annotated so that users can understand where to put things, how to forecast cash, cost of goods sold (COGS), payroll and operating expenses. You will find that it is simple to customize, easy to use, yet precise enough to give you the confidence you need to keep your company on track and money in the bank.

Analyzing cash flow statements

Once an accurate cash flow statement is created and maintained, it's time to review the results with a detailed cash flow analysis. This process allows leaders to examine the cash flow statement under a microscope to see how money flows in and out of the company.

Start by reviewing the three cash flow areas: operating, investing, and financing.

It's important to understand the numbers and their context. A business may be profitable and still experience negative cash flow or lose money and experience positive cash flow. Analysis may also uncover unexpected problems or it may show a healthy operating cash flow. It also reveals whether a company generates enough revenue to meet its financial obligations and whether there is money left over after the bills are paid.

But you don’t know either way until you review your cash flow statements or perform a cash flow analysis.

A thorough cash flow analysis is a powerful tool – empowering business leaders to make necessary corrections and take proactive steps to maintain a sustainable company. By adjusting net income with key cash inflows and outflows, businesses gain a clearer picture of how much cash is truly generated by core operations, a better sense of financing needs and a snapshot of the growth potential of the organization.

Related: Tips to improve your cash flow strategy

Need Help Creating a Cash Flow For Your Business?

We get it, finding the time to manage – let alone interpret –financial data is hard. At Focused Energy, we take the day-to-day finance and accounting burden and turn that data into tactical recommendations for sustainable business growth. If you need a hand managing or creating more cash flow, we are the partner for you.