A Guide to Business Cash Flow Analysis

Revel Blog | Sydney Kida | April 22, 2022 |

accounting Featured

How to Perform a Cash Flow Analysis and Why You Should

As a business owner, chances are you’ve heard the term cash flow analysis. But what exactly does that mean? Your cash flow is the money you have to hand to cover your business’s expenses and keep the wheels moving. 

Without a positive cash flow, your business risks going under. In a country where 25% of companies go under due to cash flow issues, the ability to perform cash flow analysis correctly is a core skill for any business owner.

But figuring out how to analyze cash flow and how to interpret a cash flow statement isn’t always straightforward. And let’s face it, it’s your all-important cash flow, so you want to be right on the money. Here’s everything you need to know about performing cash flow statements analysis the right way.

What is a Cash Flow Analysis?

You already know that cash flow is the life force that runs through the veins of your business, but how exactly are you supposed to analyze it?

Analyzing your cash flow gives you an overview of your inflows and outflows over a specific time window. You can see where your money is being generated and where it’s been spent.

Based on your business cash flow analysis, you can determine whether you’re making or losing money. This knowledge allows you to make strategic and informed decisions about where you need to make changes.

Before we move on, it’s important to note that cash flow is different from profit. Companies will typically combine their cash flow statement with other financial documents to better understand the business.Read more about the importance of data-driven decisions.

What Should Be Included in Your Cash Flow Analysis?

The cash flow statement is broken down into three sections:

  • Operating activities show cash flow generated when your company delivers its usual lineup of goods or services. It also includes the expenses required to fund operating activities, such as purchasing new stock.
  • Financing activities measure debt and equity financing. 
  • Investing activities include everything from buying assets like real estate to selling assets like vehicles. It can also include non-physical property, including patents.

Why should you split your cash flow analysis into different categories like this?

Appropriate categorization empowers you to determine how much cash is being generated from different business activities. After analyzing these sections, you can make better business decisions.

A healthy company should have its operating income exceeding its net income. Positive cash flow means you’re solvent, and you can continue growing and expanding.

How to Do a Cash Flow Analysis

You can’t take any intelligent cash flow measures without knowing how to do a cash flow analysis in the first place.

While the term may sound daunting, cash flow analysis is quite simple. All you need are your books, and you can start calculating.

Figure Out the Starting Balance

The first step is to find your starting balance for the beginning of your desired reporting period. Simply look at your income statement from the same period. Happy cheerful young asian male in glasses smiling and using laptop in cafe

The starting balance is essential if you’re using the indirect method of calculating cash flow from the operating activities of your business. If you’re using the direct method, you can skip this step. (We’ll discuss these two methods shortly.)

Choose Your Calculation Method for Operating Activities

The next step is to calculate cash flow from your operating activities.

Practically all businesses prioritize this section because it shows how much cash you’ve generated from your day-to-day business activities.

You can select either the direct or indirect method of calculating cash flow. Regardless of which option you settle on, both methods will give you the same number for operating activities.

Direct Method

Using the direct method is the most straightforward way to calculate your cash flow. Simply take all the cash from every business operation and subtract any disbursements. Using this approach, you’ll be listing every transaction in and out of your business over your chosen reporting period.

While the direct method is simpler to understand, it requires more work because you’ll be accounting for every transaction that took place.

Indirect Method

The indirect method requires a little more thought. You’ll be starting with your net income from your income statements. The indirect method involves removing the impact of accruals, such as amortization and depreciation.

Indirect cash flow statement creation is faster and is more closely linked to the balance sheet. 

Calculate Cash Flow from Investing Activities

After establishing your cash flow from operating activities, it’s time to move to investing activities. This section of the cash flow focuses on your larger assets, such as property, facilities, and any industrial equipment you have.

It doesn’t include any debt, only free cash. Most small and medium-sized businesses only have a small number of assets, so this is an easy section to complete.

Calculate Cash Flow from Financing Activities

Your cash inflows and outflows from financing activities include equity financing and debts. If you have any inflows from outside investors or you took out a bank loan to fund the expansion of your business, it’ll come under financing activities.

Note that you’ll also include any dividends paid if you're using GAAP standards. Under IFRS standards, dividends will be included under operating activities instead. The same rule applies to any interest paid.Learn more about the best accounting method for your business. Work Out Your Ending Balance

After you’ve worked out your cash flows for each of the three categories, you can work out your ending balance for the reporting period.

Add up your operating, financing, and investing cash flows. This value will show you whether you’ve made an overall gain or loss during the reporting period. You can also drill down into each set of activities to see what contributed most to that final figure.

Positive balances indicate your company made more than it spent, whereas a negative balance indicates the opposite.

Cash Flow Analysis Example

Building a cash flow statement for your small business is simple enough in practice. To help demonstrate the process, let’s take a look at an analysis of a cash flow statement with an example.

For this example, we’ll be using a fictional restaurant as they perform their business cash flow analysis.

Luigi’s Restaurant Cash Flow Example

Luigi’s Restaurant has reached the end of its first full year of business. During its initial year, it attracted a lot of customers and gained a few regulars. Its net income for its first year was $110,000, an impressive sum for a first-year restaurant.

Note that this is its net income, so its expenses have already been deducted and applied to the operations activities of its cash flow statement.

Luigi’s also invested in kitchen equipment and all the fixtures and fittings required for theCooking Chicken restaurant. In total, it managed to keep its costs down to $200,000, well below the average price required to launch a restaurant in a leased building.

Like most new businesses, Luigi’s had to take out a substantial loan to find the initial capital necessary to get off the ground. To keep things simple, the bank provided a loan to the tune of $150,000, with the rest of the capital being provided by the business’s owners.

In terms of its financing activities, Luigi’s is paying off $716 per month because the bank charged a 4% interest rate.

Its principal payment of debt came to $8,592 for the first year to conclude its only financing activity. So, where does that leave Luigi’s for its cash flow by the year’s end?

Its total outgoings were $208,592 for the first year, with a net income of $110,000. The cash flow statement will leave Luigi’s with a -$98,592 shortfall in cash flow.

At first glance, it sounds terrible, but most of its investing activities were natural for a first-year business. It was also forced to take on considerable debt to fund its purchasing activities.

If it manages to grow its net income by a modest 10% during its second year and finish on a figure of $121,000, Luigi’s will likely enjoy a significantly positive cash flow for its second year.

How to Analyze a Cash Flow Statement

Your cash flow demonstrates whether you have enough capital available to meet your obligations. Analyzing your cash flow statement can help you spot trouble ahead and keep your business agile. Let’s look at three critical concepts within any analysis.

  • Operating Cash Flow/Net Sales – This ratio is expressed as a percentage and indicates how many dollars of cash will be generated per dollar of sales. The higher the percentage, the better.
  • Free Cash Flow – A company’s free cash flow is its net operating cash flow minus any capital expenditure. This metric shows a company’s efficiency when it comes to generating cash. Calculate this number by finding your operating cash and subtracting capital expenditure.
  • Comprehensive Free Cash Flow Coverage – You can also calculate a ratio for free cash flow by dividing free cash flow by net operating cash flow. The higher the percentage, the better.

Remember that analyzing your cash flow statement shouldn’t be done in isolation. Business owners combine their analysis with analysis of other financial documents, including the company’s balance sheet.

Regardless of the areas you focus on, the goal should always be as cash efficient as possible. That protective financial barrier must always be there to keep your business chugging along.

The Importance of a Cash Flow Analysis

As a business owner, you’re busy. So why should you go to the trouble of setting aside time to analyze your cash flow in the first place? Cash flow analysis helps you assess the financial health of your company and decide important next steps. Analyzing your cash flow allows you to:

  • Maintain adequate reserves of capital to meet your obligations
  • Prepare for significant loan repayments well in advance of their due dates
  • Know whether you need to start cutting your business costs
  • Avoid interruptions (profits on paper are of no help until the money is sitting in your account)
  • Build up a financial cushion to avoid added stresses during busier periods

Knowing every facet of your company’s financial health is vital to growth and expansion. Avoiding costly and embarrassing financial missteps caused by cash flow mismanagement will ensure the survival of your business.


Cash flow is the biggest headache small business owners face, yet these problems often sneak up on entrepreneurs. Gathering the numbers and finding the time to go through them can quickly become an afterthought due to the other obligations you have to meet.

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