Cash Flow Analysis - Definition, benefits and how to analyze cash flow statement?

Apr 05, 2024

Your cash flow is an integral part of your business. You want to maintain a positive cash flow to keep your business running smoothly. One thing that will help you do this is regular cash flow statement analysis.

Find out what is cash flow analysis, why it’s important to your business, how to analyze cash flow statement, and what are the steps to help grow your business better.

What is cash flow analysis?

Cash flow analysis is the review of your cash inflows and outflows. A cash flow analysis looks at your cash flow statements in depth and pinpoints details to gain a better understanding of where and how your cash is gained or spent. 

There are three types of cash flow that you’ll want to look at when conducting a cash flow analysis, the three types being cash flow from operating activities, cash flow from investing activities, and cash flow from financing activities.

When you analyze cash flow statement, you’ll look at all three types to draw conclusions on how the cash in your business is doing.

Key areas that affect cash flow for business

Like any other business aspect, cash flow analysis is more complex than simply taking a look at your statements. There are key areas in your business that you have to examine and make a note of how they affect your cash flow. 

1. Accounts payable

A major part of your cash flow statement is your cash flow from operations. When calculating this, you need to consider your accounts payable.

Comprised of a number of vendors that you’ll have to pay within a short amount of time, the way you manage your accounts payable will greatly affect your cash flow.

For example, it may seem like you don’t have a lot of cash outflow right now, but you might have accounts payable that you need to settle at a later date.

You want to be making note of your accounts payable in great detail when conducting cash flow analysis. This way, you can be aware of how much money that goes into your business is actually reserved for your vendors as accounts payable.

If your accounts payable aren’t managed well, it’s very likely that your cash flow will end up in the negatives before you know it.

2. Accounts receivable

Similar to accounts payable, accounts receivable also make up a big part of your cash flow from operations.

In contrast to accounts payable, however, rather than the outflow of funds, you’ll be looking at the inflow when it comes to analyzing accounts receivable. 

The deal with accounts receivable is that until your customers pay for the products that they’re buying, you won’t have hard cash on hand yet.

To have a holistic view of funds flowing into your business, you’ll want to take into account pending payments and unsettled invoices from customers. You can identify trends and pinpoint when you’ll be having a lot of cash inflow to use for expenses.

3. Investments and financing

Oftentimes when people think of cash flow they think of the cash flow associated with operating activities. While they do make up a big part of the cash flow statement, the two other types of cash flow should not be ignored either.

However, some cash inflows and outflows from investments and financing have long-term effects that won’t be reflected in your cash flow statements just.

You’ll need to make note of them and separately review how they fit into your cash flow when analyzing cash flow statements. 

Cash inflows from investments include the sale of businesses or assets that you have, but they won’t reflect how past investments are bringing you huge amounts of cash in sales.

Therefore, when you spend a lot of money on a particular investment, it may need context to justify the cash outflow in your cash flow statement.

Conversely, an item considered cash inflow from financing could be cash received from a loan. It’ll have to be noted that this loan will have to be repaid long-term. 

4. Inventory

If you have supplies and merchandise on hand ready to sell to your customers, they’d be categorized as your inventory.

While your inventory might not be directly reflected in your cash flow statement as they are excess supplies rather than active cash inflow and outflow, they’re important to note when analyzing cash flow statements. 

Cash outflow from buying supplies recently might seem like a necessary thing to keep up with production for more cash inflow in the future, but this might not be true if you still have a lot of inventory.

Adding to it is not nearly as effective as using your cash for other expenses. You want to consider ways to use your inventory to positively impact your cash flow.

5. Credit

Credit, both on the giving and receiving end of it, has an impact on your cash flow even if it won’t be reflected on your cash flow statement until the credit has been settled.

If your business has been offered a credit line, for example, you’ll have to keep in mind that although it’s considered cash inflow right now, you will have to repay that credit, thus making it a future cash outflow. 

On the other hand, extending credit terms to a customer will mean that there’s a delay in your cash inflow. You want to ensure that you have the right timing of customer payment due dates so that you don’t fall prey to cash flow problems.

When you analyze cash flow statement, keep in mind any credit given or received and how they would affect your cash flow. 

Boost your cash flow with expense management software

Benefits of cash flow analysis

Helps strategize, and manage the inflow and outflow of cash

Businesses aren’t stagnant. Having to realign your business priorities and strategies every once in a while is a common process for most businesses. Often, doing so will help you grow your business faster and better. 

To help you figure out your priorities and strategize better, you should be regularly analyzing cash flow statements to see where your business is at.

For example, you’ll be able to pinpoint what payments are costly and taking a big toll on your cash flow. Similarly, you can also determine which stream of inflow is impacting your business the most. 

Given that you’ll have a complete view of how your cash is present, you’ll also be equipped with the information you need to make well-informed decisions.

Come up with a game plan to strategically cut down your operating expenses or strategize on how to increase the effectiveness of your revenue streams. 

Understand fiscal impact in multiple countries

If your business operates internationally or is looking to expand to more countries, it’s a good idea to regularly perform business cash flow analysis. You’ll be able to determine how the countries you already operate in are affecting your cash flow. 

With a better understanding of the fiscal impact in those countries, you’ll find yourself not only developing better strategies for existing business entities but also coming up with a well-thought-out expansion plan.

Identify new and existing market opportunities

Cash flow statement analysis doesn’t just give you a better understanding of your business internally.

Instead, it allows you to identify opportunities in new markets as well as markets you currently operate in. Both internal and external factors affecting your cash flow will become obvious after in-depth reviews and analyses.

When you match your business needs, priorities, and current position with market opportunities, it’ll be easier to determine the best course of action.

Whether that’s to expand into new markets that would support your business growth, strengthen your business in its current markets, or withdraw from certain markets that have a negative impact on your cash flow, doing a cash flow statement analysis will help you make sure that you’re moving in the right direction.

Prevent cash flow problems

The last thing you want is to run into cash flow problems and issues in your business. But it’s difficult to be well-prepared for situations when you don’t have precedents. This is where analyzing cash flow statements can help you out.

By having a look at previous cash flow statements and examining them in greater detail, you’ll have a more solid idea of what your inflows and outflows look like at different points throughout your fiscal year. 

If previous years’ cash flow statements show that you were often in a tight spot during a certain month of the year, you’ll be able to prepare yourself better for that same month in the coming years.

Looking for patterns in your business cash flow analysis enables you to stop issues and warning signs before they turn into unmanageable cash flow problems.

How should you analyze cash flow?

The very first step to performing cash flow statement analysis is to prepare your cash flow statements. You’ll want to look at three different types of cash flow when you do this. 

• Your operating cash flow refers to the inflows and outflows of day-to-day business operations. Changes in your operating cash flow will happen on a daily basis as sales and purchases happen.

• When your business makes an expense for the purpose of investment, this is considered part of your investing cash outflow. Investing cash inflow can happen when you sell an asset that was once an investment. Investing cash flow will only occur occasionally.

• There are other financial activities that your business will participate in like paying dividends or selling stocks, which are counted as part of your financing cash flow. Typically, these don’t happen as often as items in your operating cash flow.

Anything starting from the cash you receive from your customers to salary payments to loan interests is to be included. When there’s money coming in or going out of your business, that should be recorded in your cash flow statement. 

Once you have your cash flow statement ready, you can take a look at the line items and begin analyzing cash flow statements as a whole to see what the numbers mean to your business.

For example, reviewing your operating cash flow will show you how much money you need for daily business operations, as well as how much you’re making from it. The aim is to ensure that you have a positive cash flow.

If you do have a positive cash flow, that means that your operating cash inflows are enough to cover your cash outflows. However, a positive cash flow is not immediately indicative of things going smoothly.

If you have a positive investing cash flow from selling assets but your day-to-day operating cash flow is in the negatives, that indicates that your business may be struggling to keep up with operations.

Selling assets to cover your operating expenses isn’t sustainable in the long run. You want to look for trends and patterns in your cash flow statement to identify strengths, weaknesses, opportunities, and issues in your business finances.

When analyzing cash flow statements, you’ll have to smartly determine what positive and negative cash flow of the three types mean for your business. It’s important to understand the context of where your money is coming from and going.

Suggested read: How to improve cash flow in a manufacturing business

Limitations of cash flow analysis

While analyzing cash flow statements on a regular basis will undoubtedly have benefits for your business, it’s not without limitations. Here are some limitations that you may come across when performing business cash flow analysis.

No room for growth

It should be noted that analyzing cash flow statements pull entirely from data on things that happened in the past. Your cash flow statements don’t reflect any growth that hasn’t happened yet, even if you have invested a fair bit of money. 

If you invest in research and development activities for a new product, for example, all your cash flow statement will reflect is the outflow of cash from making that investment.

It doesn’t show the return that will be made on that investment, meaning that it’s not the most accurate and complete set of information on your business. It’s essential to keep this in mind when presenting to investors.

Understanding profitability

A cash flow statement analysis is important, but it’s also not the only financial statement that you should be reviewing.

For one, your cash flow statements are not great representations of your company’s profitability, nor should they be used to understand profitability.

Considering that your cash flow statement is representative of business cash, profits are deducted and losses are added back to get an accurate picture of your cash inflows and outflows.

In contrast, a profit and loss statement is drawn up precisely to understand your profitability. When that’s the goal in mind, consider doing a P&L statement analysis in tandem with cash flow statement analysis.

Ignores accrual accounting

There are two types of accounting basis that a business can follow. Cash accounting considers and reflects your transactions based on when the money flows in and out of your business.

Accrual accounting, on the other hand, notes down transactions, income, and expenses as they happen, regardless of whether the money has changed hands or not. 

Your cash flow statement follows the cash basis of accounting. It reflects money as it comes into your business and goes out of it. The accrual method is not considered when analyzing cash flow statements.

One thing of note is that accrual accounting is often said to give a better representation of your business performance, so cash flow statements analysis alone may not give you the most accurate representation of your finances. 

Manage your account payables efficiently with Volopay

When you perform cash flow statement analysis regularly, you’ll find that realigning your business priorities to suit its current needs becomes easier.

This is because you’ll have a more holistic view of the comings and goings of your cash, with more detailed information compiled through reviewing and analyzing cash flow statements. 

However, review and analysis are only two pieces of the puzzle. To make your analysis worth your time, it’s essential that you follow through with plans that you’ve come up with as a result of pouring through your cash flow statements.

You might find it a struggle to analyze your accounts payable or organize them in a way that makes sense to your cash flow. This is where accounts payable automation comes in handy.

With Volopay accounts payable software manage your accounts payable more effectively. In turn, this will positively impact your cash flow. Be on top of all your vendor payouts and easily schedule payments before the invoice due date.

Avoid any late payment fees to ensure that there are no leaks in your cash flow. Maintaining a positive operating cash flow without difficulty can be achievable in no time with Volopay.


What is the purpose of cash flow analysis?

The reason why analyzing cash flow statements is important for businesses is so that you can have a better idea of how much cash your business generates and spends during a specific time period. Having this information available to you will help you make smarter decisions regarding your business finances. 

What tools can you use to manage cash flows?

There are many kinds of cash management solution available that will help you track and manage your cash flow. You can also use a variety of tools like checking and savings accounts for your business, accounting software, and expense management software to strengthen your cash flow management. With a combination of these, you’ll be able to stop any cash flow leakage and manage your cash better for future uses.

What is accrual accounting?

Accrual accounting refers to the accounting method where you record transactions as soon as they occur rather than when the money changes hands. For example, if you sell a customer a product on a particular credit term, with accrual accounting you’ll record the transaction as soon as the customer receives the product rather than when the payment is settled.

Simplify and automate your accounts payable process