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Tracking your company’s cash balance can feel like an overwhelming task—but it doesn’t have to be. And doing so is essential to making sure your company is prepared for both good times and rough periods in the future.
Here’s what you need to know about preparing and analyzing your cash flow statement to best inform day to day and long-term decisions about your business spending and general operations.
Performing a cash flow analysis allows you to track changes in your business’s cash balance during a specific period by calculating cash income versus cash expenditures.
This process will help you to identify patterns, not only around how much money is coming in and going out of your business, but also when—enabling you to plan ahead and avoid being short of cash when bills and payroll are due.
Your cash flow statement will also give you a snapshot of your business’s financial health: whether or not your everyday operations (without outside help from investors or loans) are generating enough money for the business to sustain itself. This is your company’s liquidity—an important factor for monitoring for the longevity of your business.
It’s smart to do a cash flow analysis on at least a monthly basis. But if you’ve had recent cash flow problems, it may be worthwhile to track your cash flow weekly or even daily for awhile. The more frequently you update your cash flow analysis over time, the more apparent patterns of cash flow in your business will become, and the better you’ll be able to predict (and prepare for) leaner times.
Tracking cash flow is especially important for seasonal businesses whose sales numbers tend to fluctuate dramatically from month to month. If most of your annual revenue comes in during short, isolated pockets of the fiscal year, you’ll need to carefully plan accordingly to cover year-round expenses.
Remember that a cash flow statement is just that: a statement of how much cash your business has at its disposal at a given time. It’s distinct from an income statement, in that it shouldn’t include non-cash financial transactions.
Many businesses make the mistake of tracking all transactions (including credit-based ones) within their cash flow statement at the time they take place, and not when the money actually changes hands. This can give you the false impression that your assets in hand are more robust than the reality, and cause you to burn through cash more quickly than you can afford.
In your accounting software’s cash flow analysis feature (or in our free template, to make the process as painless as possible), start by entering your company’s cash balance at the beginning of the tracking period. This number should include all of the company’s bank account balances as well as any petty cash.
Take this figure from your balance sheet if this is your first time running a cash flow analysis, or from your most recent cash flow statement (the ending balance) if you have done one previously.
You’ll be tracking income (inflows) and expenses (outflows) for each of three categories: operating activities, investment activities, and financing activities.
The operating activities category covers your day-to-day business income and expenses: income from sales and paid receivables coming in are operating inflows; payroll, payments to suppliers, insurance, and business taxes are examples of operating outflows.
Investment outflow covers bigger-ticket items like purchase of equipment or real estate. These are long-term investments of assets in your company, rather than nitty-gritty daily purchases like supplies or goods for resale. If you rent out or sell equipment or real estate assets, those proceeds count as investment inflow in your cash flow analysis.
In the financing activities category, you’ll track incoming capital from taking out a business loan as inflow. Any payments you make on a loan or dividends paid to investors will count as outflow in this category.
For each category, mark the inflows as positive and the outflows as negative. Double check that you’ve entered all your expenditures and incomes for the analysis period. Add everything up, category by category, then total the three categories’ balances.
Add in the starting balance to calculate your ending balance. Then subtract your starting balance from your ending balance for the period to determine whether your cash flow over the statement period in question was positive or negative.
Once you’ve started regularly tracking your cash flow, it will be helpful to keep twelve months’ worth of cash flow stats in one spreadsheet so you can easily see patterns throughout the year.
Now that you have a cash flow statement, how do you use it to better inform spending and sales decisions?
Just looking at whether your cash flow during the analysis period was positive or negative is a good start. If you see a pattern of negative cash flow over several months, it’s likely time to implement cost cutting or revenue building measures to work toward a positive cash flow. Consider raising prices, cutting down excess inventory, changing marketing tactics, or adjusting your staffing schedule to realign your cash flow in a better direction.
Figures from your cash flow analysis can also help you measure other areas of your company’s financial health. For example, look at the ratio between your operating cash flow (day-to-day cash expenditures and income) and your net sales to see how much cash from sales is going into your company’s pocket rather than to overhead. Ultimately, you want your cash flow to increase as sales increase, meaning that your cash profit from sales is holding steady.
Once you’ve mastered the basics of tracking and analyzing your company’s cash flow, you might want to investigate some more complex figures, such as your company’s free cash flow—an important number for venture capitalists and others who may consider investing in your business. These higher level cash flow analytics can give you a bigger-picture view of your company’s finances.
Contact SCORE or your local Small Business Development Center (SBDC) for advice on how to dive deeper into the impact of your company’s cash flow on its long-term financial health.