How to do a cash flow analysis

Cash flow analysis is an often overlooked step in cash management. Failing to do this can mean the difference between running a successful long-term business and shutting your doors. Business owners must be able to understand the difference, between cash flow and profit. They should also understand the concept of free cash flow. Savvy and successful business owners, have to be able to prepare cash budgets and statements of cash flows. And most importantly they have to be able to manipulate their cash flows, as economic conditions change.

Cash is the major ingredient in keeping your business running. Cash flow can be defined as the way money moves into and out of your business. Cash is the difference between just being able to open a business, and being able to stay in business. A cash flow analysis is a method of checking up on your company's financial health. It is the study of the movement of cash through your business, (also called a cash budget), to determine patterns of how you take in and pay out money. The goal is always to maintain sufficient cash for business operations, from month to month. This type of cash flow analysis is also called developing the cash budget. Here is what you need to know about how to do a cash flow analysis-

This analysis is part of your firm's financial forecasting plan. You should determine the amount of cash that will flow into your business during the month. If you are just starting your business, you will need to include the beginning balance in cash that you want to have available every month. There should also be the amount of sales you have during the first month. Remember that sales would include:both cash sales, and sales that you make to your customers who pay on credit.

You will then need to determine the amount of cash that will flow out of your business during the month. You will have expenses. You will probably have to buy office supplies, and other monthly expenses may include:advertising, vehicle expenses, payroll expenses, etc. Remember that you will have some quarterly expenses, such as taxes. You may also have expenses that just occur occasionally, like purchases of computer equipment, vehicles, or other larger expenses.

The bottom line is that you want the cash that will flow into your business, to be greater than the cash that will flow out of it. This means that your monthly cash inflow needs to be greater than, your monthly cash outflow so you will have sufficient cash to operate your business.

The next thing to remember is that your ending balance for the first month becomes the beginning balance, for the second month. You will then do the same type of analysis. Each month, you may need to add more items to your cash flow analysis, as your business grows. You will have to decide what the minimum ending cash balance, is that you find acceptable, for your business and then aim toward that figure each month.

Remember that if your cash flow turns negative for any one month, you will have to borrow money, for that month, from family or friends, investors, or from a bank or other financial institutions. Then, if your cash flow is positive the next month, you can repay that loan.

You will need to keep on doing this each month, for your forecasting period. You should try to keep your borrowing to a minimum, and your cash inflow, greater than your outflows. Remember that this cash budget is a financial forecasting document, but you should still try to follow it as closely as possible.