Cash flow analysis: A step-by-step guide (+ example)

Cash flow is more important than ever. According to the QuickBooks Business Solutions Survey, 90% of founders and executives agree that higher interest rates have made accessing financing more difficult over the last year. 

When funding is tight, your business can maintain stability and growth by effectively managing the cash it’s generating. Understanding your cash flow is the key to doing just that.

Cash flow analysis is the process of tracking all the money moving into and out of your company. It gives you a clear view of your business's ability to meet its obligations and fund future growth from its own resources. 

This article will guide you through what cash flow analysis is, why it's so important (especially now), how to perform it step-by-step, and how modern tools can help you streamline the process for better insights.

Jump to:

• What is cash flow analysis?
• How to do a cash flow analysis (+ example)
• Why cash flow analysis is important
• How to transform your cash flow analysis with Intuit Enterprise Suite (IES)
• Boost productivity and enhance profitability

What is cash flow analysis? 

Cash flow analysis looks at the actual movement of cash—money coming in and going out—within your company during a set timeframe.

Analyzing cash flow helps you see if your core operations generate enough cash, determine whether you have enough money to cover immediate payments, and whether you can afford new investments or debt repayments. 

These are the key terms to know to perform the analysis effectively:

• Operating activities: Cash flow from your main day-to-day business operations (e.g., sales, paying suppliers)
• Investing activities: Cash flow from buying or selling long-term assets (e.g., equipment, property)
• Financing activities: Cash flow related to debt and owner funding (e.g., loans, owner investments, paying dividends)
• Operating cash flow (OCF): The cash your business generates just from core business operations
• Capital expenditures (CapEx): Money your business spends on buying or upgrading long-term assets like equipment or buildings
• Free cash flow (FCF): The cash left over after covering essential asset spending, available for other uses
• Operating cash flow ratio: Shows whether your business can afford to pay upcoming bills with operating cash flow
• Cash flow margin: Shows how efficiently you turn sales into cash

How to do a cash flow analysis (+ example)

Here’s a step-by-step guide to conducting a cash flow analysis for your business. Following these steps will help you use your financial statements to see exactly where cash came from and where it went over a specific period. This process breaks down the analysis into manageable parts, giving you a clearer view of your cash movements.

1. Gather your financial statements

Goal: Collect the right reports to understand your cash situation.

You'll need three main reports:

• Cash flow statement: This is your primary tool because it directly tracks all cash moving in and out
• Income statement (P&L): Shows your profit, which is the starting point for understanding operating cash flow
• Balance sheet: Shows assets and liabilities; changes here help explain differences between profit and actual cash generated

Get statements for the current period and a prior period. Comparing helps you spot trends—are things getting better or worse?

Having these reports ready lays the foundation for the analysis. It ensures you have the raw data needed to understand your actual cash performance, not just your reported profit.

Let's use this example statement comparing a "Current Year" to a "Year Prior" as we go through the steps:

2. Analyze your operating cash flow

Goal: Determine whether your core business operations are actually generating cash.

Find the "Cash from operations (OCF)" line on your cash flow statement. This number shows the cash your business generates from its main activities, like selling products or services, after accounting for day-to-day operating expenses.

• Example: Current Year OCF is $41,300; Year Prior was $27,000.

OCF tells you whether the fundamental business model is working from a cash perspective. Consistent positive OCF means your operations can sustain themselves and potentially fund other activities. It provides stability and reduces reliance on loans or investors for daily operations. 

Negative OCF might signal operational issues or problems with your business model that require attention. You might need to improve sales, cut costs, manage inventory better, or speed up customer payments.  

In the example above, OCF is positive in both years and improved significantly. This suggests the core business is healthy and becoming more efficient at generating cash. 

To understand why OCF differs from net income, refer to the lines above the OCF (like “Change in accounts receivable”). For instance, collecting cash faster from customers boosts OCF even if profit stays the same.

3. Calculate free cash flow

Goal: Find out how much cash is available after paying for essential business investments.

Calculate FCF by subtracting money your business spent on essential property, plant, and equipment (Capital Expenditures or “CapEx” is usually in the Investing section) from your OCF.

FCF=OCF−CapEx  

Based on the example above, that would look like this: 

• Current year: $41,300 - $3,800 = $37,500
• Year prior: $27,000 - $3,000 = $24,000

OCF shows cash from operations, but businesses usually need to reinvest some cash just to maintain existing equipment and facilities (CapEx). 

FCF shows the cash that's truly 'free' for other choices after your business makes these necessary investments.

A positive and growing FCF (like in the example) is a strong positive signal. It means the company generates more than enough cash from operations to maintain itself and has extra cash available—which provides flexibility. 

Negative FCF means operating cash wasn't enough to cover essential reinvestment, suggesting the company might need external funds just to stay at its current level.

FCF is a key number executives watch. It shows the cash available for strategic moves like expanding the business, developing new products, paying down debt faster, buying back stock, or paying dividends to owners. It represents the company's capacity to grow and reward its stakeholders.

4. Review investing and financing activities

Goal: Understand how the company uses cash for growth and how it funds itself.

Look at the other sections of the cash flow statement to see where the business used and generated cash. Investing shows cash it spent on long-term assets, while financing shows cash the business paid out to or received from owners or lenders.

• Investing: The company increased its cash spending on investing activities ($8,800 vs $5,000), mainly due to buying more marketable securities.
• Financing: The company significantly reduced its cash outflows for financing activities ($5,200 vs $12,000), almost entirely because debt repayments were much lower in the current year ($1,400 vs $9,000). Dividend payments were slightly higher.

These sections reveal strategic choices: High spending on investing might mean the company is focused on growth, while high cash used in financing might mean it's paying down debt or returning cash to owners. 

Now, compare these activities to your OCF. Ideally, OCF covers essential CapEx (as checked by FCF). 

Is extra cash from operations funding growth investments? Or is the company borrowing money to fund investments or even cover operational shortfalls? 

In the example, the company invested more but financed less, indicating a shift in how it allocated cash.

Analyzing these sections helps assess if the company's growth strategy is funded sustainably (ideally by operations) or if it relies heavily on external debt or investment, which might carry more risk. It also shows how financial decisions (like borrowing or paying dividends) affect the company's cash reserves.

5. Calculate key cash flow ratios

Goal: Get quick insights into liquidity and efficiency using standard calculations.

Now let's evaluate two key ratios: the operating cash flow ratio and cash flow margin. To calculate them, we need data usually found on the balance sheet and income statement. Let's assume:  

• Current Liabilities: $25,000 (Current Year) / $20,000 (Year Prior)
• Net Sales: $220,000 (Current Year) / $180,000 (Year Prior)

As you can see, the operating cash flow ratio improved, meaning the company is better equipped to cover its short-term debts. 

The cash flow margin also improved, meaning it's getting more efficient at converting sales into usable operating cash. 

Declining ratios could signal potential problems with paying bills or operational inefficiency.

6. Compare trends and benchmarks

Goal: Understand the bigger picture of your cash performance over time and compared to competitors.

Now let’s pull it all together:

How have OCF, FCF, and key ratios changed over the periods you analyzed (like Current Year vs. Year Prior in the example)? 

Are things improving, declining, or staying flat? Understanding the direction is as important as the numbers themselves.  Trends show your own progress or lack thereof. 

Next, compare your numbers to industry averages or those of your competitors. Benchmarks provide external context that can help you understand your own data even better. 

For example, maybe your OCF grew 10%, but the industry average was 20%—this could suggest your business is lagging behind. 

Why cash flow analysis is important

Performing regular cash flow analysis offers significant benefits beyond just understanding cash movements. It's a vital tool for strategic decision-making and maintaining financial stability. Specifically, this analysis provides advantages in several key areas:

Assesses business viability and liquidity

Cash flow analysis directly addresses two fundamental questions: 

Can your core operations generate enough cash to succeed long-term (viability)? 

And can you pay your immediate bills (liquidity)? 

Consistent positive operating cash flow suggests viability, while tracking inflows and outflows reveals your current liquidity. This analysis often acts as an early warning system, highlighting potential cash shortages before they show up as losses in your profit figures.  

Improves financial planning and budgeting

Looking ahead requires a solid foundation, and your cash flow history provides just that. Analyzing past trends helps you create more reliable financial forecasts and budgets, a core part of financial planning and analysis (FP&A). 

Specifically, this analysis allows you to:

• Develop realistic projections for future cash inflows and outflows, potentially informed by improved demand planning
• Anticipate periods when cash might be tight or when you might have excess funds available
• Plan proactively, such as arranging credit before a shortfall, delaying nonessential spending, or timing investments strategically
• Build budgets based on projected cash flows, making them more actionable for managing finances
• Use variance analysis (comparing actual vs. budgeted cash flow) to identify deviations and refine future plans

With a clearer financial picture established through better planning and budgeting, you're well-positioned to evaluate strategic uses for your company's resources. This naturally leads to considering how best to allocate funds for growth and stability through investment decisions.

Helps you make smarter investment decisions

Decisions about growth, like whether to buy new equipment or expand, depend on available cash. Free Cash Flow (FCF)—the cash remaining after covering operations and essential asset expenditures—shows what is truly available for strategic moves, paying dividends, or reducing debt. 

Analyzing FCF helps you confirm affordability, prioritize investment opportunities, and determine whether you need external funding.

Enhances debt management

If you plan to borrow money, lenders will look closely at your cash flow. They focus heavily on your Operating Cash Flow to gauge your ability to consistently make loan payments (interest and principal). Strong, predictable cash flow demonstrates your capacity to meet these obligations reliably.

Your cash flow analysis should help you decide how much new debt your business can safely take on without overextending. 

Since lenders heavily rely on this repayment ability when considering loans, demonstrating consistent positive cash flow through clear reports often leads to more favorable terms and stronger banking relationships. 

To refine this assessment further, you can use key cash flow coverage ratios, which directly compare your cash generation to your debt load, supporting careful debt management decisions.

Identifies operational strengths and weaknesses

How efficiently is your business running behind the scenes? Breaking down your operating cash flow offers valuable clues into your operational health. Examining components like accounts receivable, inventory, and accounts payable helps you:

• Assess how effectively your company manages working capital
• Reveal specific operational issues, such as slow customer collections, inefficient inventory management, or accounts payable workflow bottlenecks
• Highlight operational strengths, like effective working capital cycles that consistently generate strong cash flow
• Pinpoint areas needing attention, leading directly to actionable improvements in business processes (e.g., refining collection policies, optimizing inventory)

Making these operational adjustments directly strengthens your company's ability to generate and preserve cash. These improvements contribute significantly to overall financial health and long-term performance.

How to transform your cash flow analysis with Intuit Enterprise Suite (IES)

Performing regular cash flow analysis is crucial for understanding your business's financial health and making informed decisions. While you can perform this analysis manually, specialized accounting software like Intuit Enterprise Suite (IES) can transform the process, saving you significant time, improving accuracy, and unlocking much deeper insights.

Here’s how leveraging such a tool can elevate your cash flow analysis:

Build analysis on a foundation of trust

Confidence in your analysis starts with confidence in your numbers. Instead of relying on manual data entry for every bill and payment, let technology handle it. 

AI-powered transactions in IES automatically record and match many financial documents, significantly reducing the risk of human error. This means the system generates cash flow statements based on more accurate, up-to-date information that you can rely on for your analysis.

See your real-time cash position clearly

Stop waiting for month-end reports to understand where you stand. Intuit Enterprise Suite gives you real-time visibility into your cash flow. 

Dashboards and easily accessible reports provide an up-to-the-minute picture of your cash balances and movements, helping you stay constantly informed and avoid unwelcome surprises.

Uncover deeper insights hidden in your data

A basic cash flow statement tells you what happened, but often you need to know why. To get those deeper insights, you need flexible analysis tools. 

Multi-dimensional reporting capabilities allow you to slice and dice your cash flow data in ways that make sense for your specific business, perhaps by location, project, department, or product line. This helps you pinpoint the exact drivers behind your cash flow trends.

Plan your business’s future with confidence

Effective cash flow analysis empowers proactive planning. Instead of relying solely on rough estimates, you can leverage AI-generated forecasts built directly from your financial data. These tools help you anticipate potential cash surpluses or shortfalls with greater accuracy. 

Combined with dynamic analysis features, you gain the foresight needed to make timely decisions about budgeting, resource allocation, and future projects with confidence.

Actively manage cash flow with payment tools

Understanding your cash flow also means managing the timing of inflows and outflows more effectively. 

Integrated payment tools can help accelerate the flow of cash from customers. They also allow you to strategically schedule your own outgoing payments, giving you better direct control over your cash balance and improving the accuracy of your short-term cash projections.

Intuit Enterprise Suite helps transform cash flow analysis into a more efficient, insightful, and strategic process for your business.

Boost productivity and enhance profitability

Improving your cash flow analysis process elevates your financial management from simple tracking to strategic decision-making, directly contributing to improved business efficiency and profitability. 

Understanding where your cash comes from, where it goes, and where it will be is fundamental to navigating challenges and seizing opportunities. 

Ready to gain clearer insights and better control over your company's cash flow? Discover how the integrated tools in Intuit Enterprise Suite can automate analysis, streamline payments, and provide powerful forecasting capabilities. Take the next step toward optimizing your financial health today.