When it comes to running a business, one of the main responsibilities of an owner is to ensure its financial stability. A cash flow analysis is a fundamental activity, providing a big picture of how money flows in and out of the company. 

According to a survey by Canadian Western Bank, 60% of small and medium businesses have experienced challenges managing their cash flow. This includes 30% facing delayed invoicing and payments, and 26% having issues managing accounts receivable and accounts payable.

This underscores the importance of conducting regular cash flow reviews. Here we’ll explain what a cash flow analysis is, the benefits, how to do a proper analysis, and the tools you can implement to simplify the process. 

Table of Contents 

• What is a cash flow analysis?
• When do you do a cash flow analysis?
• Why is cash flow analysis important?
• Creating a cash flow statement
• How to do a cash flow analysis
• Example of cash flow analysis
• Using cash flow management tools
• FAQ

What is a cash flow analysis?

Cash flow analysis involves keeping tabs on the money entering and exiting your business over a specific period. It helps assess the financial health of your business by analyzing cash inflows (such as sales and accounts receivable) and outflows (such as expenses and loan repayments). 

Whether you operate a small or medium-sized business, it's important to consistently review your financial goals and assess if you’re meeting your targets. These types of analyses can uncover underlying problems or prove that you have strong and healthy operations.

Furthermore, a cash flow statement categorizes these transactions, which provides insights into whether your business generates sufficient cash to cover expenses. Conducting this analysis helps to summarize your business's current and future state. That’s why understanding cash flow is valuable in preventing cash shortfalls, maintaining liquidity, and making informed choices.

When do you do a cash flow analysis? 

It’s recommended to do a cash flow analysis on a regular basis, such as monthly, quarterly, or annually. This will depend on the size of your business and cash flow complexity. 

This activity is especially important during the following milestones:

• Periods of strong growth 
• Before applying for financing
• Planning for big expenses 

Also, if you run a seasonal business (such as selling holiday gift baskets or swim-wear), you should conduct more frequent reviews to manage fluctuating cash flows.

Doing so can help you anticipate future financial obligations, prevent cash deficits, and ensure smooth operations. Plus, you can plan for slow periods or forecast when additional cash injections may be necessary.

Why is cash flow analysis important? 

Cash flow analysis is vital for businesses to stay afloat. It can help you understand if your business is earning enough cash to meet its financial needs, such as processing payroll, paying off loans, and issuing vendor payments. 

These are the main advantages of regularly analyzing cash flow:

• Identify financial trends or cycles.
• Predict cash shortages.
• Decide how to make investments, expand, or use cost-cutting strategies. 
• Ensure you have adequate cash to prepare for emergencies.
• Prevent paying high interest charges or penalties on loans.
• Maintain liquidity to avoid production delays or service interruptions. 

In Canada, where many small businesses contend with seasonal fluctuations, cash flow analysis becomes significant to manage periods of decreased revenue. Also, it improves financial credibility when applying for loans or seeking investors.

Overall, it’s a good way to pinpoint where there are inefficiencies, such as specific areas in which you’re overspending or under-utilizing assets. 

Creating a cash flow statement

Before performing a cash flow analysis, you need to prepare a cash flow statement. A cash flow statement is a financial document that profiles your company’s cash inflows and outflows over a specific period.

3 types of cash flow activities 

The standard cash flow activities consist of the following three categories:

1. Operating activities: These are daily transactions such as sales, staff wages, and rent payments.
2. Investing activities: Typically, these cash flows are related to buying or selling assets, including property or equipment.
3. Financing activities: This category covers cash flows from loans, lines of credit, or equity investments.

Understanding these categories helps small business owners monitor where cash comes from and goes, providing insights into current operations and helping with long-term financial planning.

How to do a cash flow analysis 

Here are the 5 steps you can take to perform a cash flow analysis:

Step 1: Collect your financial records

This includes your bank statements, invoices, and receipts so you can gather information about all your sources of income and expenses. 

Step 2: Create your cash flow statement

Categorize your cash inflows and outflows based on the operating, investing, and financing activities. 

Step 3: Calculate your net cash flow

Subtract your total outflows from your total inflows.

Step 4: Analyze your cash flow statement

Look for patterns or trends based on the financial data. 

Step 5: Make business decisions

If you have negative cash flow, you may consider cutting costs or increasing revenue streams. If you have positive cash flow, you may want to reinvest it or save it for future expenses. 

Example of cash flow analysis 

Here’s an example of Casey’s Coffee Shop with the following cash flow statement: 

Cash flow from operations:

• Net income: $130,000
• Adjustments:
• Payroll: ($50,000)
• Depreciation: $8,000 (non-cash adjustment)
• Rent: ($18,000)
• Accounts receivable: ($5,000) (cash outflow due to increase in receivables)
• Net cash from operations: $65,000

Cash flow from investing:

• Equipment sales: $25,000
• New equipment purchase: ($35,000)
• Net cash from investing: ($10,000)

Cash flow from financing:

• Loan payment: ($17,000)
• Owner investment: $25,000
• Net cash from financing: $8,000

Net change in cash account:

• Net cash from operations: $65,000
• Net cash from investing: ($10,000)
• Net cash from financing: $8,000
• Net change of $63,000

Analysis of Casey’s Coffee Shop

Here’s a summary of how well the coffee shop performed during this period.

Strong operational efficiency: Casey’s Coffee Shop produced a net cash flow of $63,000. This signifies solid cash flow from its daily operations, reflecting effective cost management and revenue generation. 

Investing in growth: The shop is investing in new equipment (such as a new coffee grinder and espresso machine), which is important for enhancing service quality and operational capacity. However, note that this results in a net cash outflow for this period.

Financing strategy: The coffee shop is benefiting from new investment from the owner while handling debt repayments efficiently.

Financial flexibility: A significant increase in cash reserves boosts the shop’s liquidity, providing flexibility to manage future opportunities or obstacles.

Investor outlook: Investors should be pleased to see the coffee shop’s positive cash flow from operations and strategic investments. The balanced approach to financing and investing, along with the increase in cash reserves, indicates a well-managed business with the potential for continued growth.

Using cash flow management tools

Organizations can benefit from using cash flow tools to simplify the process. Solutions like QuickBooks monitor cash flow, allowing you to forecast future cash needs. These tools can generate reports, measure performance, and help you track your invoices.

Cash flow management tools reduce manual errors and save time. This can be valuable to small business owners so they can focus on growth strategies. Leveraging these user-friendly tools is impactful, especially for businesses with varying incomes due to seasonality or unforeseen expenses.

Striving for financial stability 

Cash flow analysis is essential for Canadian small business owners and solopreneurs to ensure solid financial health. By regularly reviewing your cash inflows and outflows, you can anticipate potential shortfalls, improve liquidity, and make better financial decisions. 

Whether managing a new startup or a well-established company, understanding cash flow helps you adapt to a competitive market. Utilizing cash flow tools and techniques can provide a strong foundation for long-term success, allowing your business to grow while maintaining stability.

You can build a sustainable business by incorporating cash flow management into your operations as a business owner. QuickBooks provides cash flow tools to help you streamline your finances. Get started today.