Constructing a Cash Flow Analysis for Your Business

Put simply, cash flow is the way that money moves into and out of your business. It’s also something that should be carefully analyzed no matter how long your establishment has been operating. Ideally, you should start keeping track of profits and losses before you even welcome your first customers.

When you gain cash, that’s called inflow, but when you spend it, that’s referred to as outflow. The more aware you are of where your money’s going and how often it’s coming in, the stronger your business should be.

Why is it Important?

If you’re not sure how much money you are spending and making, it’ll be extremely difficult to make forecasts for the future and figure out whether you can afford to invest. Furthermore, you’ll need cash flow data if you intend to apply for business financing.

Three Important Sections 

Generally, whenever you begin analyzing your finances, the sheet that includes your data will have three sections that are all related to money, but essential in their own right. The first will relate to operating activities. In that section, you’ll list net profits and losses.

You’ll also need to create a section that deals with finance-related activities. If you apply for a loan and are approved for it, the money you gain should be recorded in this portion. However, if you spend money for the purpose of paying back your loan, that transaction should be recorded here as well.

Finally, a third section should be made for documenting investment activities. You can discuss things like sales and acquisitions of property here, but also need to give details about any equipment purchases or leasing agreements that you spend money on with the intention of getting items that will be used across several years.

Not Just for Cash

Despite its name, a cash flow analysis doesn’t just track money. It can also be used to chronicle non-cash expenses, such as depreciations. Because equipment ages, it represents an expense, even if you do not have to actually spend money to keep the items in working order.

Using the Data to Make Projections

When used along with a profit-loss statement, the data discussed above can be extremely helpful in allowing you to make educated guesses about whether your business is doing well enough that you can do things like expand to other markets or hire more employees without seeing your business go “in the red.”

Getting more informed about your cash flow can be tricky if you’re not accustomed to looking more closely at the data. An accountant is a worthy resource if you need more assistance than what’s offered by the information above.


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