Cash Flow Analysis

Cash flow analysis is very important as a business tool. Cash flow is the lifeblood of any business, whether you have a small one-person business run from your home or a large business with multiple locations and many employees. If there’s not enough cash coming in, there’s not enough cash to pay the bills or pay employees or to invest in your business.

Do you need additional small business financing or do you have money to invest back into the business?

Do you have slow periods throughout the year that you need to save for?

You will know if you keep track of your cash flow.

cash flow analysis

To a lot of business owners, though, financial statements are very intimidating, so they don’t take as much of an interest in them as they should.  Some small business owners just use a checkbook as their accounting system (gasp!).

Even so, just looking at the cash balances on your balance sheet (or your checkbook) is only a snapshot of a moment, really, not a look forward. Looking at two or three balance sheets together, say for three months in a row or three years in a row, will give you a better indication if your cash is growing or decreasing, but that too is only seeing the surface.

So how do you figure all this out?

Let’s keep things simple.

You’re going to need a calculator and some ledger paper or graph paper if you feel better with pen and paper, or if you’re comfortable using Microsoft Excel (or some other spreadsheet software) just open a new file.

At the top of the sheet, title the first column “description”, then head one column for each of the next 6 weeks. For our purposes here, we’re going to use this time line. If you want to use 4 weeks, or 6 months, or some other time frame, feel free. If you’re doing this to obtain bank financing, you’ll want to use each month for the next year. But that’s a little more involved.

On the first row, enter your current cash available, which you can get from your current bank statements. This is the starting point.

On the next few rows, list out each revenue stream your business has. For example, if you run a video store, you may have dvd rentals, dvd sales, late fees, etc. Then you’ll want a row for Total Cash In.

The next section is for expenses, or Cash Out. Here list everything you have to pay out every month, like utility payments, mortgage or rent payments, employee payroll, etc. Again, you’ll want a row labeled Total Cash Out.

Skip a line and title the next row Total Cash Available. This will be the difference between your Cash In and your Cash Out. Hopefully it’s a positive number!

Next in your cash flow analysis begin filling in your columns for each week in the appropriate row. To estimate your cash inflow, estimate your sales for the next 6 weeks.

A good way to do this is pull out your bank deposits for the last 3 months, and add up your weekly receipts for each of these months.  Next, see if there is a pattern, or take an average.

For your cash outflow, list your bills in the appropriate weeks based on the date you would make the payment.

For example:

Sample Cash Flow Analysis

cash flow forecast

To start off our cash flow analysis, we have $1000 in Week 1 listed as Beginning Cash. This amount is in this storekeepers bank account right now. That’s our starting point.

The next step in our cash flow analysis is to add up our expected revenues for the first week, which in this case are weekly dvd rentals, dvd sales, and late fees received. Add those together for each week to get the Total Cash In. For the first week this would be $3175.

Add to the Beginning Cash of $1000 and you get $4175. This is your Total Cash Available for this week.

The next step in our Cash Flow Analysis is to add up all your bill and loan payments for this week. This is your Total Cash Out.

Take your Total Cash Available and subtract your Total Cash Out for this week. This will give you your Cash Over/Short.

If it’s a positive number that is cash over, meaning you will have cash left over after paying everything for that week. If it’s negative, obviously you won’t have any cash left over, and you won’t be able to pay everything that week.

The next step in our Cash Flow Analysis is to take your Cash Over/Short from the first week, and place at the top of the next week’s column as Beginning Cash. Then go thru the process again until you have all your columns filled in.

This little exercise shows this store owner many things.

First of all, it shows a cash gain of $990 for this 6-week period.

However, this cash flow analysis also shows that one of those weeks, Week #4, has a negative cash flow for that week, so they won’t be able to pay all their bills for this week.

It also shows that one week out of each month has higher sales.

The store owner can now make some informed decisions to positively influence their cash flow. It might be possible to lower the payroll cost for Week #4 to lower the expenses for that week, or to place an ad or have a sale to increase rentals in that week, etc.

Now the owner is more informed about the business, and can make detailed decisions to better manage this business. They might want to buy more dvd’s to rent out, for example, or run some advertisements, and this cash flow analysis will show them if they have the resources to do so.

This process should be updated regularly, so you can see how your decisions affect the business, either positively or negatively.

As you can see, cash flow is indeed the lifeblood of every business, and a cash flow analysis is an important tool for any business owner to use for decision-making.

If you’d like to see a 12 Month Cashflow Projection, click here.


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