Have you ever heard the term “cash is king”? It holds, especially in the realm of business. Cash flow analysis is your business health checkup, a tool that empowers you to track the amount of cash entering and leaving your company. It’s significant because it provides real-time snapshots of your company’s financial health beyond profit. Profit is a monetary gain when Income exceeds expenses, but cash flow represents the money available. Profit can be positive even if cash flow is negative, which can lead to liquidity issues. Understanding this gives you the power to take control of your business’s financial stability and growth.

Key Components of Cash Flow Analysis

Operating Cash Flow (OCF)

OCF is the lifeblood of any organisation, representing cash generated directly from operational activities. OCF indicates how much profit a business can generate from its products or services. Net income is adjusted for non-cash expenses like changes in working capital and depreciation to calculate OCF. Such would have a healthy implication about whether a business enterprise shall have the scope to sustain its operations and maintain its growth without opting for a funding source or dependency upon others. It reflects the company’s strong financial position and efficient operations. For example, Consider a tiny café. If operating cash flow is determined by deducting its labour, rent, and ingredient costs from the money it makes selling products like coffee and snacks, then the income that surpasses the expenses indicates a positive operating cash flow whereas, if not, that shows a negative operating cash flow, indicating there may need to be some financial adjustments.

Investing Cash Flow (ICF)

The cash invested in long-term assets supporting the company’s revenue generation is reflected in Investing cash flow, which covers investing in other businesses, buying property, plant, and equipment (PP&E), and selling these assets. Even though a negative ICF may indicate that a business is making significant investments in its potential for growth, it’s crucial to ensure these are profitable ventures. Businesses with persistently low ICF should be closely examined to ensure their investments aren’t depleting shareholder value.

Financing Cash Flow (FCF)

Financing Cash Flow deals with a business’s money flow with its creditors, investors, and owners. It comprises dividend payments, principal debt repayment, and debt or equity issuance proceeds. FCF offers information about a company’s financial strategy and how it balances using its resources and borrowing money from outside sources. If the company has enough operating cash flow to support these operations, a negative free cash flow (FCF) could indicate that it is paying down debt or paying dividends, both of which are indications of sound financial standing. An example of FCF is when a local bakery secures a loan to expand its seating area and upgrade kitchen equipment. The loan provides the funds needed for improvements, resulting in a financing cash inflow. However, the bakery will make regular repayments, impacting its cash flow while enhancing its capacity to serve more customers.

The Benefits of Regular Cash Flow Analysis 

Monitoring cash inflow and outflow helps you understand how your business is performing. It’s like having a way to see what might happen in the future based on your numbers. Your cash flow report shows three main things: how you run your business, where you invest money, and how you handle financing. It’s a critical aspect that lets you understand the benefits of cash flow, which are essential for your business’s financial sustainability and growth. This regular analysis provides security, knowing you are on top of your financial situation.

Assessment of Liquidity and Solvency

Cash flow analysis provides information on the cash amount that a company makes or overspends over a given accounting period. By monitoring and evaluating the cash flow results from financing and investing operative activities, a business can determine its liquidity and solvency; it offers a perception of its capacity to fulfil immediate obligations and preserve financial stability.

Comparing Cash Flow with Profit

It’s crucial to understand that cash flow and profit differ. Profit is what’s left of your earnings after you pay your bills, while cash flow is the real money moving through your business. A business can make good profits but still run low on cash or the other way around. You need to watch both to keep your business healthy.

Operational Health

Positive cash flow reflects a company’s ability to pay off debt, reinvest, and meet expenses. It indicates that liquid assets are growing. On the contrary, negative cash flow indicates declining liquid assets and possible financial difficulties. Operational health of cash flow offers a real-time picture of your company’s operational health, aided by which you can make educated decisions.

Day-To-Day Operations

Cash flow guarantees that your company can continue to run daily. You must invest in expansion, buy inventory, or pay your bills with positive inflows. Effective cash flow management keeps your company solvent and helps avoid needless debt. To maintain seamless sales operations and satisfied customers, a retail store handles daily operations by replenishing inventory and handling customer transactions effectively.

Procedure for Cash Flow Analysis

The first step in starting a cash flow analysis is gathering all relevant real-time data from financial information, including sales, expenses, loans, and financial transactions; these data will be classified into discrete groups, distinguishing between sales revenue and costs. Condense this data into a brief cash flow statement explaining your financial situation. Look at your cash flow over months and years to see what happens at different times. You might find times when money is tight or times when you spend more during busy seasons. This helps you plan ahead and fix problems before they get big. Create a plan of action to support cash flow based on your analysis, which could involve reducing expenses, negotiating with suppliers, or launching projects to increase revenue. Following this systematic process will help you maximise your finances. To learn more, head over to a blog we recently published: Understanding Cash Flow: 9 Mistakes and How to Avoid Them.

Enhance Your Business Decisions with Pulse

Pulse works like a helper that watches your money day by day. With Pulse, you can see what’s happening, plan what you want to do, and make better choices for your business. It’s a tool that helps you handle your money better, so you know what’s going on and feel more sure about your choices. With its seamless integration of Open Banking and Open Accounting features, Pulse transforms cash flow analysis. Using these features, Pulse functions as a data nautical tool, effortlessly slicing through financial data and offering priceless insights. Real-time cash flow forecasts are available through Pulse, facilitating accurate financial planning and proactive decision-making. Pulse provides a thorough picture of your financial situation by connecting your accounts, enabling more in-depth research and tactical optimisation. Embrace a simplified approach to cash flow management by saying farewell to conjecture.

Summing Up

Cash flow is like oxygen for your business. When it flows healthily, your business thrives; when it stagnates or drains, it’s time to take action. Keep monitoring your cash flow to maintain financial flexibility and success! You can learn more about economic strategies, investment choices, and operational efficiency by analysing operating, financing, and investment cash flows. Frequent analysis enables proactive steps to maximise financial position and confidently negotiate uncertainty. Businesses can ensure long-term success by making informed decisions with the help of tools like Pulse for real-time insights.

Contact our team at info@mypulse.io to book your free demo today and master the art of cash flow analysis.