No matter what kind of company you run, a cash flow statement is incredibly important when it comes to managing your business and finances. If you’ve never done one before (or you need a bit of a recap), we’ve put together a simple 5 step process so you can get on top of it ASAP.
What Is Cash Flow Analysis?
Cash flow analysis is a process that involves examining a company’s current and future cash flows. You can use cash flow analysis to create cash flow projections. These help you to establish more accurate budgets and make wise plans for future withdrawals.
Why Does It Matter?
Like cash flow statement generation, the cash flow analysis process also plays an important role in running your business and managing its finances. Here are some specific benefits that regular cash flow analysis has to offer:
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Maintain cash reserves so you have enough set aside to cover surprise bills and obligations.
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Manage credit so you can avoid declined charges, interest penalties, fees, and damage to your company’s credit report.
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Adjust promptly when financial issues arise so you can navigate unexpected difficulties with ease (and without having to take drastic measures).
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Prevent production interruptions related to lack of cash flow, which can further throw off your budget and your company’s profitability.
Cash flow analysis is a process that involves examining a company’s current and future cash flows. You can use cash flow analysis to create cash flow projections.
How to Perform Cash Flow Analysis in 5 Steps
Cash flow analysis may seem a bit intimidating. However, once you get started, you’ll find that it’s not too difficult or time-consuming.
Outlined below are 5 simple steps you’ll need to take to perform a quick cash flow analysis for your business:
1. Start With Your Cash Flow Statement
The first step is to take a look at the cash flow statement for your company. If you don’t already have one, follow these steps to set one up:
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1. Determine the amount of cash in all of your business’s bank accounts
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2. Calculate all expected income for the month (not future sales, but actual money you’ll receive this month)
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3. Calculate all expected cash going out for the month (rent, salaries, taxes, other expenses)
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4. Add the numbers you got in steps 1 and 2. Then, subtract the number you got in step 3 from that sum
2. Divide The Statement Into Categories
Next, organize your statement into the following 3 categories:
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Operating transactions: Expenses and money received from daily business operations
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Investing transactions: Transactions related to the purchase or sale of business assets
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Financing transactions: Transactions related to loan payments, dividends earned, etc.
While you’re going through this step, be sure to mark all incoming transactions with a plus (+) sign and all outgoing transactions with a minus (-) sign.
3. Keep Tracking Transactions
Continue to track transactions throughout the month. Mark them with a plus or minus, depending on what’s applicable, and sort them into the appropriate category. Focus on cash transactions, rather than sales where you’re still waiting for money to come in.
4. Schedule Regular Reviews
Be sure to regularly review your finances and conduct cash flow analysis.
If you do this consistently, it’s not hard to keep up and manage your money. However, if you continuously put it off, you’ll be faced with a pretty daunting task at the end of the year or quarter.
5. Look For Trends
As you’re regularly conducting cash flow analysis, keep an eye out for potential trends (both positive and negative).
For example, are there certain times of the year when you receive large inflows of cash? Are there times when you have shortages?
It doesn’t matter what kinds of patterns you’re noticing. Use this information to improve your planning and prepare for the future.
For most businesses, a monthly cash flow analysis is sufficient. This will help you keep an eye on the money coming in and going out.
How Often Should You Perform a Cash Flow Analysis?
For most businesses, a monthly cash flow analysis is sufficient. This will help you keep an eye on the money coming in and going out. It also ensures you’re not taken by surprise when you go to apply for a loan or meet with an investor.
How PayChoice Can Help
If you want to improve your cash flow and make getting paid easier, PayChoice is the #1 payment solution for Australian business. Whether you want to set up recurring direct debits, accept online payments or launch your eCommerce store, we have a solution for you.
The right tools can make all the difference when it comes to managing your business, and PayChoice is one of the best options. Businesses in all kinds of industries use PayChoice — from the fitness industry to the real estate industry and everything in between.
Now you know how to do a cash flow analysis!
Hopefully, now you know the benefits of a cash flow analysis and how to do it. Keep these tips in mind, and you’ll be a financial wiz in no time.
Don’t forget to check out PayChoice, too so you can quickly and easily streamline payments for your business. Contact us today to learn more about our platform and how we can help you grow.
