How to Develop a Cash-Flow Analysis

WASHINGTON – For small businesses, cash is king. You need it to start, operate, and expand your operations, but many small business owners often have trouble managing and maintaining cash. Inaccurate cash flow analysis – or lack of available cash – can affect the everyday operations of your business and your eligibility to receive a loan.

Cash flow is the movement of money in and out of your business. The process includes:

• Inflow which comes from operations such as the sale of goods and services, loans, lines of credit, and asset sales.
• Outflow which occurs during operations such as business expenditures, loan payments, and business purchases.

It’s crucial to balance these two figures and maintain a reasonable balance of cash at all times. An effective cash flow system will help you manage funds to cover operational costs and bills and help you foresee potential problems in the future.

Profit and loss statements and income statements can be used to determine projections for future cash flow trends of your business. These financial documents are instrumental in making cash flow projections. However, a cash flow statement serves an important and independent purpose – it accounts for non-cash items and expenses to adjust profit figures. Cash flow analysis statements display not only changes over time, but also available net cash.

Cash flow analysis statements are generally separated into three parts:

• Operating activities: This section evaluates net income and loses of a business. By assessing sales and business expenditures, all income from non-cash items is adjusted to incorporate inflows and outflows of cash transactions to determine a net figure.
• Investment activities: This section reports inflows and outflows from purchases and sales of long-term business investments such as property, assets, equipment, and securities. For example – if your bakery business purchases an additional piece of kitchen equipment, this would be considered an investment and accounted for as an outflow of cash. If your business then sold equipment that was no longer needed, this would be considered an inflow of cash..
• Financing activities: This section accounts for the cash flow trends of all money that is related to financing your business. For example: if you received a loan for your small business, the loan itself would be considered an inflow of cash. Loan payments would be considered an outflow of cash, and both would be recorded in this part of the cash flow analysis statement.

Making cash flow projections and computing cash flow statements can be confusing if you have never managed these types of finances before. Ask your business accountant or contact a business expert from your local SCORE office for help.

SOURCE: U.S. Small Business Administration.

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