Cash Flow Analysis FAQs

What is cash flow analysis and why is it important for business?

Cash flow analysis involves examining the movement of money in and out of a company over a defined timeframe. Where it originates from, where it goes and the corresponding amounts. The net cash flow for a period is calculated by subtracting current liabilities from current assets.

Incomings will typically consist of sales revenue, loan proceeds and investment returns, with outgoings encompassing various expenses like salaries or rent payments, as well as utility bills and loan repayments. For SMEs, having a decent understanding of their cash flow is important because it means the valuable insights you gain from the reports can be made actionable, driving business operational efficiency and ensuring your finances are managed properly.

There are three crucial metrics that need to be understood to perform a complete cash flow analysis, and are important as they differentiate each category of cash movement:

It should be noted that analysing your cash flow goes beyond just keeping a track of your cash, although this is of course a key component, a thorough analysis is about predicting your future inflows and outflows as well. Through forecasting cash flow, an SME can prepare themselves for the future by ensuring they have the necessary funds to meet their commitments or take advantage of new opportunities.

Importance of Regular Cash Flow Analysis

Regular cash flow analysis is also important for SMEs to keep a continued view of their financial trends, as it helps to identify potential challenges before they can escalate, and also means any contingency plans remain accurate and effective should an emergency occur. Below we’ll go through the main benefits that SMEs we work with speak about:

Getting Started with Cash Flow Analysis

Let’s start going through some of the key steps that SMEs are advised to follow if they want to ensure their own cash flow analysis is being performed correctly:

  1. Get your financial statements in order: Having your income and cash flow statement, as well as your balance sheet for the specific time frame you are intending to review will be necessary to begin within.
  2. Keep track of Cash inflows and outflows: It will be necessary to keep structured and thorough records of any and all cash inflows from things like sales and investments, and the same for cash outflows that involve expenses or loan repayments.
  3. Use accounting software tools: In the current year businesses are only putting themselves at a disadvantage if they are not fully utilising the range of third party fintechs out there, from Pulse, to Quickbooks and Xero, as well as many the many open source bookkeeping tools that are available to simplify and automate cash flow analysis processes.
  4. Regular reviews: This is most important for maintaining an understanding of the performances of your different cash flows, helping ensure that numbers do not become inaccurate, which can lead to numerous financial problems down the line because your strategies will be based on the incorrect projections.

Practical Tips for Effective Cash Flow Management

With those key steps in mind, let’s next have a look at some tips that we frequently hear being passed around amongst SMEs that helps them with their cash flow management:

We will always advise business owners and SMEs to familiarise themselves with the ins and outs of a cash flow analysis if they want to develop their small business financial intelligence. Once the correct metrics are analysed and insights are obtained and acted upon, the benefits of the processes quickly become clear, and those same businesses can start developing their financial strategies for achieving long term success.

How does cash flow analysis differ from profit and loss statements?

Profit and loss statements (P&L) compared to cash flow analysis differ because they are two separate metrics, covering two different areas of a business’s financial performance — P&L represents the money left after expenses while cash flow forecasts track the movement of cash either into or out of a business.

When you start exploring P&L, (otherwise known as an income statement), you will be able to zero in your business’s income and expenses during a specific timeframe, and completed correctly, should detail an enterprise’s ability to successfully generate profits. Your P&L statement will comprise of financial data on the following:

With these metrics in mind we can see the P&L statement provides an accounting perspective on profitability but fails to provide a detailed picture of cash inflows and outflows. If we look at a cash flow statement, we’ll see that it gives details on how cash enters and leaves a business instead, through taking accurate financial data from operating, investing, and financing activities.

How their differences play out in practice:

When you start breaking it down the different purposes that both P&L and a cash flow statement serve become clear, while both being important for assessing an enterprise’s performance. Their combined focus will help to provide a comprehensive picture of both your business’s financial health, and its operational efficiency.

What are the key components of cash flow analysis?

A business’s financial records will typically show cash flow on a statement as net cash flow, however there are three different types of cash flow that make up this number, and to be able to perform a succinct cash flow analysis, they each need to be understood, and data for each obtained. Let’s take a closer look at each of them:

Cash Flow from Operating Activities

To  get a solid grasp of the components of a cash flow analysis let’s look over some examples of the cash generated from core business activities, that way we can get an illustrated idea of exactly what is included in cash flow received from activities like sales and cash used for operating expenses:

Why it’s important: Maintaining the cash flow from a business’s operations is crucial for its short and long term health, and is of course necessary for maintaining operations and pushing growth. A healthy cash flow also demonstrates a company’s capacity to produce cash and fund its operational costs, which is important for potential investors, or financial lenders if there is ever a need for external funding.

Operating activity insights:

Cash Flow from Investing Activities

Moving onto investing, let’s take a look at some typical examples of cash that many of the business owners we work with discuss as being used for and generated from their investments in long term assets:

Why it’s important: Investing activities effectively illustrate how a business and its leaders distribute their resources for expansion, and while a negative cash flow doesn’t necessarily spell bad, it could just mean that investments are being made now that will help that future expansion.

Investing Activity Insights:

Cash Flow from Financing Activities

Lastly we come to cash flows from financing, the section of your cash flow statement that will include any cash transactions involved with financing your business. It could include borrowing money, repayments on any outlying facilities, or something like equity transactions, let’s take a look at some more detailed examples:

Why it’s important: The significance of financing activities has always lain in the fact that they reveal how well a company is supporting its own operations and expansion, as well as how it rewards its shareholders. On closer analysis, positive cash flows here should indicate that a business has acquired some funding, and negative might suggest repayments and dividends.

Financing Activity Insights:

Additional Cash Flows to Consider

Net Cash Flow: A business’s net cash flow is the outcome of all money coming in and going out, showing the overall shift in its cash position over the designated period, and is ideal for understanding your business’s liquidity and general financial condition.

Cash Flow (FCF): cash flow is determined by subtracting Capital Expenditures from your Operating Cash Flow and is another measure that can be used to see how much money you’ll have left over after maintaining or expanding assets. Business owners can use this metric to evaluate their financial adaptability, with a positive FCF indicating that the your business will have enough funds to pursue growth opportunities.

Some Practical Cash Flow Analysis tips

Fully comprehending the key components of a cash flow analysis will help businesses manage their liquidity and better plan for future growth, as well as make more informed financial decisions, which is why enterprise owners should get themselves familiar with the process so they can make it a regular part of their business strategy.

How often should cash flow analysis be conducted?

Whenever we speak to business owners about cash flow analysis, the status quo is to review cash flow every month, that way you can be certain of what is coming in and going out, but more importantly, when you can expect these cash inflows and outflows to occur. There are also quarterly and yearly, and in some cases much more frequent cash flow analysis that business owners are encouraged to perform, so let’s take a closer look at the options.

Benefits of monthly cash flow analysis:

To illustrate further why monthly cash flow analysis is the ideal option for maintaining a complete view over your business’s financial health, let’s break down some of the key reasons, and how they can bring you into better financial management.

Depending on the age, size, or sector of your business, where cash flow is volatile or you are in a growth phase, it is even advisable to monitor your cash flow as often as weekly, or in some extreme cases daily while that period lasts, as it will certainly help keep a grasp of your liquidity, and ensure an even more precise picture of any cash inflows and outflows, helping to meet obligations with further stresses or difficulties.

Quarterly and Annual Cash Flow Analysis

Although we suggest committing to monthly cash flow analysis, there are still broader reviews you should do alongside them to get a bigger picture of your inflows and outflows across the year of trading, so let’s look at their benefits:

Using Technology for Cash Flow Analysis

There are a number of different technological methods that businesses have available for use in the current year, and although if you are a business owner you are likely already using some of them, let’s break down the options to demonstrate their uses:

Hopefully this makes things clear why monthly assessments are important for business strategy and growth, with more frequent reviews better illustrating how cash flow fluctuates and what business owners can expect of their cash flows. Quarterly and annual reviews are also important, and each compliments each other, combined with the use of fintechs to make your cash flow analysis smoother and more bearable, you can ensure you are a step ahead of any competitors who do not take their cash flow so seriously.

What Tools and Methods can I use for Effective Cash Flow Analysis?

The Fintech revolution has been a blessing for businesses across all industries and sectors, particularly the financial sector where fintech tools can be utilised by accountants and financial advisors to help SMEs get a better grasp of their financial wellbeing. Cash flow analysis is critical for this, and in helping business owners sustain the longevity of their brands.

Even prior to the fintech revolution there were many useful tools that SMEs and their advisors could use to perform a rigorous analysis, however technology is increasingly removing the need for human intervention, and with it, any risks of human error. From classical spreadsheets, to modern accounting software, to specialised cash flow management tools, the list of methods is growing, and are here to help you manage and analyse your cash flow effectively. Let’s take a look below:


One of the most traditional, still useful and used methods for cash flow analysis has always been the spreadsheet. Modern versions like Google Sheets and Microsoft Excel are heavily used, and not just for financial reasons. They allow users to create detailed cash flow statements that can track both cash inflows and outflows and also help you forecast your business’s future cash positions. While spreadsheets offer flexibility and plenty of customisation that is useful for niche needs, they do require frequent manual data inputs that, as previously mentioned, are at risk of human error, where incorrect numbers will lead to false projections and potential problems for your business along the way.

Accounting Software:

There are many well established and trustworthy third party modern accounting softwares available on the market today, with brands like Quickbooks, Xero, and Sage, leading the way, particularly in the UK, helping businesses analyse their cash flow. Although they each offer unique perks and some are more suitable to businesses of different sizes, the majority of these tools will automate the facets of your cash flow management. Key metrics like transaction tracking and financial reporting or forecasting are performed by the software by integrating with your bank account, and with your permission, financial data is then pulled and aggregated to provide real-time data while greatly reducing the need of manual updates.

Financial Dashboards:

The intuitive financial dashboards offered by many modern fintech companies – our own Pulse being one of them – grant a more visual way for business owners and their financial advisors to grasp the data of their cash flow analysis. This is achieved by consolidating data from open accounting and open banking sources, then aggregating the numbers to generate a comprehensive overview of your financial status. Key metrics can then be displayed, in the case of Pulse, in easy to grasp infographics such as bar charts and line graphs, breaking down otherwise complex numbers into formats that can be understood by the layman.

Specialised Cash Flow Management Tools

Specialised cash flow tools like Float that have been designed specifically for financial management will integrate with other apps such as the priorly mentioned Xero, empowering business owners with advanced forecasting abilities and improved scenario planning through the detailed cash flow reports that are provided. When utilised effectively, cash flow management tools can assist businesses in predicting potential cash shortages, as well as allowing for proactive financial management. With the idea of specialised tools in mind now, let’s start exploring why our tool, Pulse, is quickly becoming one of the most talked about cash flow analysis tools on the market for SMEs.

Pulse: The Comprehensive Solution for SMEs

Our cutting edge fintech tool, Pulse, is capable of boosting the cash flow analysis of your SME by integrating with established Open Accounting and Open Banking brands, then, on your allowance, aggregating your financial data to produce useful actionable insights. With your real-time financial data and our AI driven dashboard, we generate easy to grasp infographics and breakdowns of your data, covering your most important metrics — Turnover trends, gross margin, debtor and creditor ratios, and income statements.

Our aim was to create a simple yet powerful tool that SMEs can use to help businesses anticipate their financial positioning while capitalising on the insights we generate. To ensure you miss nothing, monthly reports are sent to your inbox with all the key information highlighted that you need to effectively manage your finances. We want to empower SMEs with a comprehensive view of their cash flow so they can convert that data directly into financial intelligence, meaning you can make better decisions and improve your strategic planning. By helping SMEs in this way, we have been able to prove ourselves as an indispensable tool for business owners and cash flow analysis.