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How to Construct a Cash Flow Analysis

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Many small business owners associate success with profits. Profits are crucial, but there’s a reason why it’s said that “cash is king.”

It is perfectly conceivable for your company to be profitable while still needing help to obtain financing, find investors, or keep the lights on because you have disregarded cash flow.

This is where a cash flow analysis can help. By following our step-by-step guide, you will be able to feel secure about your financial status and make more competent judgments about where to spend and where to cut back.

what is a cash flow analysis?

A cash flow analysis monitors cash flow in three ways:

  • Cash flow generated by operating operations 
  • Cash flow generated by investing activities
  • Cash flow produced by financing activities

If you’ve ever examined your company’s financial statements, you may notice that these are the same categories on a cash flow statement.

When you run a cash flow analysis, you can see where your money is coming from and where it is going, which provides essential information about your company’s finances.

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steps to do a cash flow analysis

Here’s how to create your own cash flow analysis, step by step.

step 1: gather your financial data

You’ll need to know your company’s starting and ending cash balances, balance sheet accounts, and net income. All of this information may be seen on your company’s balance sheet and income statement.

step 2: make a cash flow statement

Once you have your financial data, you can organize it into a statement of cash flows.

A cash flow statement is divided into three sections:

  • Operational Cash Flow

This section includes financial sources and uses connected to your fundamental business operations. You begin with net income and then adjust for anything that affects net income but does not affect cash. 

Examples include depreciation and amortization expenses and accrual accounting changes to your accounts receivable, prepaid expenses, accounts payable, and accrued liabilities.

  • Cash Flow Generated by Investing Activity 

This section discusses the cash sources and uses associated with investing in fixed assets, as well as the selling of assets and other investments, such as available-for-sale securities. 

One example of a cash inflow is paying cash for a new piece of equipment. Selling marketable securities for cash is an example of a cash outflow.

  • Cash Flow Generated by Financing Activities

 This section discusses the sources and uses of cash in the context of funding business operations through debt and equity. For example, the proceeds will increase your cash if you take out a loan. Paying cash dividends to shareholders, on the other hand, would deplete cash.

Start with your starting cash balance and add the net cash flow from the above mentioned areas. The final number should correspond to the balance sheet’s closing cash position. If it does not, you have made an error somewhere along the way.

Preparing a cash flow statement can be difficult. If you need assistance, our skilled team of professionals can guide you through cash flow and financial statements.

contact an expert!!

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step 3: examine the cash flow of your organization

You want to look at trends and outliers that give you information about the health of your organization now that you’ve generated your cash flow statement. 

Here are some questions to consider as part of your investigation:

  • Do you have a Positive or Negative Cash Flow? 

You should ideally have positive cash flow, particularly from your business activities. Free cash flow is defined as positive cash flow from business operations. It’s a good sign that you’re generating enough cash to sustain the company’s expansion.

  • Why do you have Negative Cash Flow? 

Negative cash flow is not always negative. Assume you’ve amassed considerable cash reserves in recent years and have decided to reinvest them in your business by purchasing a commercial building and new equipment. 

This year’s cash flow may suffer due to such investments, but if those investments yield revenue growth over the next several years, it may be well worth it. 

  • Why do you have Positive Cash Flow?

Negative cash flow isn’t always inadequate, and positive cash flow isn’t always good. Assume you needed a loan to provide working capital because profits were down and you struggled to pay your bills. 

Your cash flows from financing activities would only be positive because you took on more debt.

what can a cash flow study reveal about your company?

Because cash is so important in running a small business, it’s easy to believe that cash inflows are good and cash outflows are destructive. However, this is not always the case. It depends on where the money comes from and where it goes.

Let’s look at a cash flow analysis example for a fictional firm, Sara’s Canary Cage Cleaning, to help you learn how to run a financial analysis on your cash situation and what it may tell you about your organization.

Sara’s cash flow statement is as follows:

statement of cash flows: sara’s cleaning of the canary cage

The fiscal year ended on December 31, 20XX.
cash at the start of the year $15,000
Operating Activity Cash Flows
Net income  $80,000
depreciation adjustment 5,000 
Inventory increase adjustment (20,000) 
Accounts receivable decreased adjustment 10,000
net cash flow from operations $75,000
Flows of Cash Investing Actions
Cash revenues from the sale of property and equipment  $15,000
Cash paid for the purchase of equipment  (10,000)
Investing Cash Flow Net $5,000
Financing Activity Cash flows 
cash for loan repayment ($4,000)
Financing Net Cash Flow ($4,000)
Cash Flow Increase $76,000
cash balance as of December 31, 20XX $91,000

We can learn a lot about the company’s financial health from her cash flow statement. Sara had a net cash increase of $76,000 during the accounting period. 

That’s great.

Second, Sara’s cash flows from business operations accounted for the majority of the cash rise. That’s great since it means Sara has good sales revenue and manages her spending correctly.

Sara then sold some equipment she no longer needed and purchased other equipment. Reinvesting in the business is usually a wise decision!

Also, the Financing Activities section shows that Sara did not incur any new short-term or long-term debt this year. Instead, she is attempting to reduce the amount she owes to lenders.

However, Sara will have a lot of income at the end of the year, so she should consider how to use it to build the business or improve her quality of life. Sara, for example, could use that money to:

  • Hire another employee so she doesn’t have to work seven days a week. 
  • Make additional capital expenditures to help her clean twice as many bird cages in the same amount of time, or 
  • Pay off her loan balance to save on interest costs and free up more cash for other purposes.
  • Pay herself a dividend as a reward for her efforts in bringing the company to this level of success in such a short period of time.

Sara’s goals and intentions for the future year will determine the best course of action. Sara would have no idea where her money was coming from or going if she didn’t undertake a cash flow analysis. 

This study provides her with greater visibility into her business operations and enables her to estimate how she should grow her business in the future.

So, how can you find time to prepare these reports when you’re already overburdened with running your business? You enlist the assistance of others.

Countick provides a skilled bookkeeping team that compiles your monthly transactions and generates a monthly balance sheet, income statement, and other graphic reports to help you understand your cash situation and build your business. The Countick is free of hassle, and you will receive a set of financial statements to keep.


Understanding your cash status is critical for assessing your company’s health and making decisions. The more perilous your cash position, the more regularly a cash flow analysis should be performed. This way, you’ll be able to see trends and possible issues before they become significant issues.

Above all, don’t be scared to experiment with studying your cash flows. Even if reading financial documents isn’t your strong suit, a flawed analysis is better than no analysis at all. 

As you learn more about your cash inflows and outflows, you’ll improve your financial modeling skills and feel more in charge of your business finances.

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