Have you ever heard the term “cash is the 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) 

A company’s lifeblood is its Operating Cash Flow, representing the cash generated from its core business operations. OCF indicates a business’s ability to profit from its products or services. Net Income is adjusted for non-cash expenses, such as changes in working capital and depreciation, to calculate OFC. A healthy OCF indicates that a business can sustain its operations and growth without relying on external funding. 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, that 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 benefit of regular cash flow analysis  

Regular cash in and outflow is your security blanket, helping you spot trends in your finances. It’s like having a crystal ball that lets you see the future forecast based on data analytics. Cash flow is a joint financial statement, typically broken down into operative activities, operating, investing, and financing activities. 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 the money left over after deducting expenses from revenue, while cash flow is the actual money coming in and out of your company. A company can be profitable but still have a negative cash flow, or vice versa. Understanding both measures is essential for your business’s financial well-being. 

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. Examine your cash flow trends more closely over time to look for any patterns or trends that seem to come up again, such as when you’re struggling financially or spending more during busy times of the year. Use this information to project future cash flow, allowing for proactive planning and problem-solving. 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

Introducing Pulse – your new best friend in financial management. Pulse is like having a super-smart assistant who keeps track of your finances in real time. With Pulse, you can spot trends, set goals, and make smarter decisions to keep your business on track. It’s a tool that equips you with the knowledge and insights to manage your cash flow effectively, making you feel informed and in control. 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. 

Ready to take control of your cash flow? Sign up for Pulse today and start making better business decisions. Don’t let cash flow woes hold you back. Master the art of cash flow analysis and watch your business thrive.