Learn how to create a cash flow statement, perform a cash flow analysis and combat any shortfalls. Doing so just might save your small business.

Cash flow is often called the “lifeblood” of a small business. This is an apt description, because without strong cash flow, a business can literally run out of money and fail. One of the best ways to avoid this problem and strengthen your company’s cash flow is to perform a cash flow analysis.

A cash flow analysis gives you insight

A cash flow analysis will give you a good idea of your business’s overall financial health, says Cadence Bank Senior Vice President Terri Odum.

“Small business owners need to understand their cash flow, because this will tell them how much money they have at any given time to meet their expenses,” says Odum. These include everything from making payroll and paying vendors and suppliers to buying raw materials needed to fulfill customer orders.

According to Odum, analyzing cash flow is very different from analyzing sales and profits. For example, she once worked with a small business owner who was constantly overdrawing his business checking account. “As we dug deeper, it became apparent that he didn’t have a good understanding of his cash flow,” she says. “After we helped him perform a cash flow analysis, he was able to make some tweaks that boosted cash flow and prevented future overdrafts.”

The steps to performing a cash flow analysis

The first step in performing a cash flow analysis is to create a cash flow statement. Following is a step-by-step guide to help you create a cash flow statement and perform a cash flow analysis for your business.

Step 1

Begin by entering your cash balance at the start of your chosen time period (usually the first day of a particular month) into a spreadsheet.

Step 2

Record your projected cash inflows and outflows for the time period being measured, broken into three different categories of activities:

• Operating. These are inflows and outflows related to the normal operation of your business. Inflows typically include cash you receive at the point of sale (such as in a retail business) and collected accounts receivable. Outflows typically include payroll, taxes, payments to vendors and suppliers, asset depreciation or amortization, and miscellaneous office supplies and expenses.
• Investing. If your business buys or sells assets that aren’t related to the normal operation of your business, these would be considered investing activities that should be recorded on your cash flow statement. The purchase of securities or real estate, for example, would be recorded as cash outflows while income generated from these purchases would be recorded as cash inflows.
• Financing. If you have borrowed money for your business, distribute dividends to shareholders, or issue or buy back stock from shareholders, these activities would be considered financing activities that should be recorded on your cash flow statement. Loan payments, for example, would be recorded as cash outflows while loan proceeds would be recorded as cash inflows.

Step 3

With cash inflows and outflows now recorded on your cash flow statement, the next step in your cash flow analysis is to do the math by subtracting outflows from inflows to arrive at your cash position. This will serve as the beginning balance for the following period’s cash flow statement and analysis, when you will perform the same exercise again.

Step 4

Ideally, your cash position at the end of the period will be positive. If it is, you should have enough money to operate your business over the statement period being measured. On the other hand, if your cash position at the end of the period is negative, you will need to make arrangements for how to overcome the cash shortfall.

How to handle a shortfall

Odum offers several suggestions to overcome a cash shortfall:

• Borrow money from a bank on a short-term basis. “A small business line of credit is often a good financing option for this situation,” she says. “You can tap the line for the amount of money you need to cover a short-term cash flow gap and then repay it when the funds are available.”
• Cut spending. Another option is to look for ways to reduce your cash outflows — or in other words, your expenses — during the statement period. For example, you could lower inventory levels, stretch out payments to vendors and suppliers, reduce headcount, and cut your office expenses.
• Boost accounts receivable. You could also try to accelerate cash inflows by getting more aggressive with customers who are late in paying their invoices. For more on this, read our post, 5 Tips to Boost Accounts Receivable & Get Your Customers to Pay on Time.
• Talk with an expert from your small business bank. “There are treasury management services that will help you get funds into your account quicker,” says Odum. “With ExpressDeposit, for example, you can deposit checks right from your office without having to visit the bank.”

Make plans to meet with your financial staff soon to create a cash flow statement and perform a cash flow analysis. Doing so will help you better anticipate and plan for cash flow shortages that could cripple your business. 

And contact us to request more information about small business products and services from Cadence Bank.

This article is provided as a free service to you and is for general informational purposes only. Cadence Bank makes no representations or warranties as to the accuracy, completeness or timeliness of the content in the article. The article is not intended to provide legal, accounting or tax advice and should not be relied upon for such purposes.