How to Perform a Cash Flow Analysis
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How to Perform a Cash Flow Analysis

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It’s no secret just how important cash can be to the health of a business. Understanding how your money flows in and out is a crucial aspect of running a business, and should never be overlooked. For many small business owners, however, the task of performing a cash flow analysis can actually be rather intimidating.

Analyzing how your money flows in and out doesn’t have to be hard – you just need to follow a few fairly straightforward steps. It may take you a couple hours, but you’ll be glad you took the time once you see how much of an effect it can have on your business.

How to Perform a Cash Flow Analysis

Determining Inflow

Your first step in a cash flow analysis is to determine as accurately as possible how much money will be flowing into the business on a monthly basis. If you’re just starting out with your cash flow analysis, it’s best to include your beginning balance, as well as the amount of sales you had last month. Some people like to average out their sales for the prior 3 months, although this isn’t always an option for those who have just started their business. Keep in mind you need to include cash sales when determining inflow; not just credit.

Determining Outflow

Once you’ve figured out how much cash is coming into the business each week, it’s time to determine the amount that is flowing out. First, start with expenses; office supplies, utility costs, etc. Don’t neglect expenses that are in relation to payroll, vehicles and outsourcing, as these can add up quickly. You may want to also consider quarterly expenses – taxes, for example. Just as with inflow, your outflow will no doubt change each month. The trick, however, is to get as close as you can with your estimate.

Analyzing Trends

After you’ve analyzed the inflow/outflow of cash in your business, you’ve got to start doing the math. In order for your business to stay afloat, the number you get in step 1 has got to be greater than that in step 2. When analyzing cash flow for the following month, your starting balance will be whatever you get when you subtract the current month’s outflow from its inflow. As your business grows, it’s likely that you’ll need to add additional items each month to your outflow category; the hope is that your inflow increases as well.

Keep Watch for Negative Flow

The major thing to look for when performing a cash flow analysis is whether or not your flow turns negative. In the case that this occurs, it may be necessary to borrow money. More importantly, you should do whatever is necessary to ensure that this doesn’t happen again, as repeated negative flow can cause any business to crumble. The minute you discover you’re having cash flow issues, you should work to figure out what’s causing them. Perhaps you can lower your outflow by cutting costs, or maybe increase your inflow by putting in a few extra hours or hiring a new sales rep.

Doing a cash flow analysis doesn’t have to be as mysterious as it seems. So long as your numbers are accurate, it can make a huge difference in terms of the success of your business.

photo credit: Images_of_Money via photopin cc

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