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The Ultimate Guide to Cash Flow Analysis

For a small business owner, performing a cash flow analysis regularly is essential for success. After all, running short of cash is one of the most common causes of small business failure. The good news: Regular analysis of your cash flow can help you avoid this pitfall and manage your business more effectively.

What is a cash flow analysis?

You perform a cash flow analysis using a cash flow statement (also called a statement of cash flows). This is a financial statement that records how money flows into and out of your business during a specific pre-determined period of time.

Why is a cash flow analysis important?

A cash flow analysis gives you a well-rounded picture of your business’s financial health. Just as keeping an eye on your personal checkbook balance tells you whether you can afford certain personal expenses, regularly analyzing your business cash flow will tell you whether you’ll be able to make payroll, pay your suppliers, buy the materials to fulfill orders or carry out expansion plans.

If your cash flow analysis shows you’re running short of cash to meet expenses, you can plan ways to cut costs, obtain short-term financing, or take steps to accelerate income. If your cash flow analysis shows you have extra cash on hand, consider whether to invest it in new equipment or save for future slow periods.

Keep in mind that having a lot of cash on hand doesn’t necessarily mean your business is profitable—that’s determined by your profit margins. Conversely, even a business with strong profit margins can get into financial trouble if it doesn’t have the cash on hand to pay the bills. And a business that has a lot of debt at one point in time can still be financially strong as long as the owner knows projected cash flow can be relied on to cover the debts.

How do I conduct a cash flow analysis?

It’s a good idea to perform a cash flow analysis at least once a month, but you can certainly do so more often. If you are in a highly volatile industry or experiencing cash issues, you may want to do a cash flow analysis weekly or even daily. Project your cash flow out for whatever time frame you choose. Four to six weeks is a good starting point.

If you use accounting software, your program will have the ability to create cash flow statements easily. If not, you can download this free cash flow statement template.

Start creating a cash flow statement by taking your company’s total cash balance at the beginning of the chosen time period and entering it into your spreadsheet. (If you’ve done a cash flow statement before, take the ending balance from the last cash flow statement. If this is your first time, take the cash balance from your balance sheet.)

Next, fill in the blanks by adding cash inflows (money coming in) and outflows (money going out) in three categories: operating activities, investment activities and financing activities. You’ll mark inflows as positive (+) and outflows as negative (-).

  • Operating activities: Operating inflows include money received from sales/paid receivables. Operating outflows include money paid to suppliers, employee payroll, any taxes not related to investing or financing, and depreciation or amortization of business assets.
  • Investment activities: This refers to the purchase or sale of assets not related to day-to-day operations, such as business equipment, real estate or securities. Money spent purchasing these items should be marked as outflow; money that you gain from selling or renting them out is considered inflow.
  • Financing activities: Issuing stock to shareholders or buying it back, making payments on a business loan, or distributing dividends are all examples of financing activities. If you got a loan for your business, for instance, the loan would be recorded as an inflow; however, each payment you make on the loan would be recorded as outflow.

Once you’ve recorded all of the relevant transactions on your cash flow statement, add everything up to arrive at the closing balance (the amount left at the end of the cash flow statement period). If the closing balance is higher than the opening balance, you have positive cash flow. If it’s lower, you have negative cash flow.

Once I’ve conducted a cash flow analysis, what should I do with the information?

The more frequently you conduct a cash flow analysis, and the longer you do so, the more you’ll learn from it, as you’ll begin to see patterns. For example, you might notice that your cash flow is positive most of the time, but regularly becomes negative during the third week of every month. Unfortunately, you also notice that most of your business’s bills are due the fourth week of the month. This means you’re often caught short of cash, which is causing late payments and hurting your business credit rating and reputation with suppliers.

By examining your cash flow statement, you can figure out possible ways to remedy the problem. To cover the shortfall, you can either cut your costs or increase your income. Ideas for accomplishing these might include:

  •   Adjust staffing during the month to decrease payroll
  •   Buy less inventory if you’re adequately stocked
  •   Paying vendors later (still staying within your due dates, of course)
  •   Email a special offer to bring in more customers and increase sales
  •   Reach out to late-paying customers to speed up payments
  •   Raising prices
  •   Finding a source of short-term working capital to get you back in the black

Need some help getting started? You can get guidance for doing a cash flow analysis from mentors at SCORE, advisors at your local Small Business Development Center (SBDC), adult education programs or online tutorials offered by your accounting software provider.

Creating a cash flow analysis might seem intimidating at first, but once you’ve done it a few times, you’ll wonder how you ever ran your business without it.

(Disclosure: SCORE and the LA-SBDC Network are clients of my company).



Rieva Lesonsky

Rieva Lesonsky

Contributor at Fundera
Rieva Lesonsky is a small business contributor for Fundera and CEO of GrowBiz Media, a media company. She has spent 30+ years covering, consulting and speaking to small businesses owners and entrepreneurs.
Rieva Lesonsky