If you are running a small business, it’s important to be familiar with your cash flow and track and analyze it to know how liquid your business is. Let’s start with the basics . . . what is cash flow? Cash flow is the amount of cash (and cash equivalents, such as stocks and bonds) that a business makes or spends over time. The more cash on hand a business has as compared to its cash burn rate determines how much flexibility the business has and its overall value. So, how do you analyze your cash flow?

What is a cash flow analysis?

There are three areas of cash flow that businesses should keep track of and evaluate, which include operating activities, investing activities, and financing activities. Businesses correlate line items between those three categories to see where money is coming in and going out. This correlation, then, gives businesses insight on the overall financial health of the company.

  • Operating activities — Cash received from customers less the amount spent on operating expenses
  • Investing activities — Cash spent on fixed assets and other long-term capital investments
  • Financing activities — Funding that comes from company owners, investors, and creditors

New businesses may experience negative cash flow as they spend cash on growing, which is okay as long as lenders or investors can and are willing to support the business growth. Over the long term, businesses cannot sustain a negative cash flow and keep the business afloat. To perform a cash flow analysis, or analyze your cash flow, you must prepare cash flow statements for all three of the above categories, which is most typically done using the company’s accounting software or free templates provided by the Small Business Association (SBA).

Why is it important for small businesses?

Operating a small business comes with many moving parts, and a cash flow analysis determines whether a company can continue to pay bills and vendors and maintain enough cash to operate efficiently for the long-term.

It is important to regularly analyze your cash flow to determine where cash is coming in and going out. The analysis may show a healthy cash flow, or it may reveal unexpected problems with sales, debt, or other financing. Reviewing and tracking cash flow is helpful for strategic financial planning and preparing the business for future transactions, operations, and investments.

What do I look for in a cash flow analysis?

Cash flow analyses can tell you a lot about your business, but here are some key things to look out for:

  • Positive cash flow where operating income exceeds net income is a good indicator of sustainable growth
  • Negative cash flow when it comes to investing activities is not necessarily a bad thing — it could indicate the business is investing in property and equipment for growth
  • Positive investing cash flow and negative operating cash flow could indicate a problem with paying operating expenses

Cash flow analysis is critical for every business, and it gives you the knowledge to run your business effectively and strategically, which in turn allows you to see sustainable growth for the long-term.

If you have questions about how to analyze your cash flow, set up cash flow statements, or run a cash flow analysis, we’re here to help at Republic Bank. Give us a call at 800-526-9127 to get in touch with one of our highly-skilled bankers, or check out more of our tips online.

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