Cash Flow Analysis Fundamentals

What is Cash Flow Analysis?

One part of strategic business cash management is cash flow analysis. While cash flow measures the money that comes into and goes out of your business over a specific period, the analysis process asks whether that cash flow is sufficient to pay for day-to-day operating expenses and liabilities, or to finance investments.

More than that, cash flow analysis helps you track your cash, telling you where it’s coming from and where it’s going. What percentage of your liquidity is coming from sales? Are you relying too much on outside investors? 

The Cash Flow Statement

Analysis starts with a cash flow statement (sometimes called a cash flow report). A direct cash flow statement looks at gross cash inflows and outflows from operating activities. An indirect cash flow statement adjusts net income for deferrals, accruals, and items that affect investing and financing cash flows. Learn more about cash flow statements and see an example.

In addition to reporting, cash management includes financial activities like cash forecasting and cash positioning (treasury management).

Why Do Businesses Do Cash Flow Analysis?

By performing cash flow analysis, businesses learn what is really happening with their funds — you can’t fake cash flow data. Businesses who track cash flow carefully are better able to manage their financial circumstances and demonstrate to others the value of their companies.

Benefits of cash flow analysis:

  • Get a clear picture of your company’s financial health, by division or group
  • Be prepared for investment decisions and budgeting changes
  • Mitigate risk
  • Operate more efficiently
  • Better tax planning

Pain-points which a regular cash flow analysis process can alleviate:

  • Liquidity, debt, and solvency management for problems like past-due receivables and supplier payments
  • Uneven revenue streams for highly-seasonal businesses
  • Unforeseen external factors and economic downturns

How to Perform a Cash Flow Analysis

The simplest form of cash flow analysis looks at the high level inflows and outflows of a business for a specific period of time. It’s a lookback, not a forward-looking report like a cash forecast or even cash position might be.

Cash flow statements can be created in a spreadsheet or even a simple Word or Google doc. These simple statements are of limited utility, particularly for larger corporations or even smaller businesses who work with a large number of suppliers and customers.

What to look for when analyzing your cash flow

When considering cash flow data, there are five key ratios finance pros want to see: Cash Flow Liability Coverage Ratio (income compared to liabilities), Price to Cash Flow Ratio (cash price compared to share price), Cash Flow Coverage Ratio (ability to pay long-term debts), Cash Flow Margin Ratio (cash generated per dollar of net sales), and Cash Flow to Net Income Ratio (operatic cash flow compared to operating income). 

Learn more about why you should track these cash flow analysis ratios and how to improve cash flow analysis

Cash flow analysis with spreadsheets

A cash flow analysis relies on access to your cash data. To perform a such analysis manually, you’ll need to identify all of your sources of income (and expenditures), and then gather statements from each source. The simplest classification for this data is to bucket it into the following categories: operating activities, investing activities, and financing activities.

A skilled finance employee can turn these transactions into snapshots for other executives to review using spreadsheet software like Microsoft Excel and Google Sheets. Each report represents a point in time. With some more data wrangling, you can turn these types of reports into timelines for further analysis.

Unfortunately, when you rely on humans to gather and manipulate data, errors are likely to occur. Even the most meticulous finance professional can mistype a transaction or get the order of operations in a formula wrong. Human error is responsible for 78% of data inaccuracies and 17% of individuals erroneously delete Excel formulas

The best way to avoid these types of errors is to enable computers to automatically handle transaction data every time.

How to automate cash flow analysis

Nearly all of the data gathering, describing, and reporting about your cash transactions can be automated. With the advent of Open Banking and Bank APIs, automatically gathering every credit and debit is as simple as connecting your own financial systems with your banks.

Once you establish those connections to your banks, you can then begin to describe your transactions in a way that is meaningful to your business — payroll, office supplies, software, mileage reimbursements, etc.

Is your data organized? Then, it’s time to start reporting. Generating reports might be done in your existing financial spreadsheets or with cash flow analysis software. 

There are many different software choices for cash flow analysis, but understanding how they might apply to your business’ needs is critical to choosing the right one. Here are some questions to ask:

  • Do you need an affordable solution for one person at your small business?
  • Do you need an option that can scale from where you are to where you’re going?
  • Do you need integrations for your ERP and FX?
  • Do you need a fully-featured and SSCI-compliant version for your enterprise-level company’s financial team?
  • Do you want AI features to take your cash flow analysis to the next level?
  • Ask questions about your specific banks and how the software supports/connects them

Learn how you can automate your cash flow analysis processes with Trovata

Who performs cash flow analysis?

Enterprise corporations

Treasurers do cash flow analyses. Treasurers have unique visibility into available cash—including virtual accounts (VAM), regular accounts, assets, and liabilities— as well as historical and seasonal trends in how cash moves through the business. 

In most other companies, Controllers handle cash flow analysis. They gather all of the data from accounting transactions, Foreign Exchange (FX) transactions, and Enterprise Resource Planning (ERP) systems into one place, process all that data, and create a detailed look at how money moves into and out of the company.

Without automation, this involves logging into every bank several times a day, many spreadsheets and scripts, and clunky reports. Every time something changes, the process needs to be repeated.

Automated cash flow analysis — one of the primary services Trovata offers — relies on Open Banking to do the work for the controller (and because it’s automated, it’s more accurate). 

It also automatically collects data from other sources into a Data Lake where the Controller can identify each type of transaction and source with reusable data tags. 

Then, voila, cash flow statements instantly appear and cash flow analysis becomes the strategic effort it’s meant to be, instead of a data-gathering goose chase. And our reports look good, too.

Here are 7 Technologies That Help Power Modern Cash Flow Analysis

Small businesses

Like all business owners, Small Business Owners (SBOs) need to understand their company’s financial performance — it’s not optional. Did you know that mismanagement of cash flow is one of the main reasons why small businesses fail?

Cash flow analysis determines your company’s working capital. By closely examining how your business makes and spends money, you will understand what resources you have to run business operations and complete transactions.

Accurate, up-to-date cash flow analysis can help small businesses answer questions like: Do you have enough money to pay your company’s expenses, taxes, and bank loans? Is there enough capital to purchase assets?

Discover 10 Cash Flow Analysis Tips for Small Businesses

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