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A Quick Guide to Cash Flow Analysis

Branson Low | February 2, 2022

For any business, it’s important to keep track of cash flows and understand how cash moves into and out of the business. Cash flow analysis is an important tool that can help companies achieve this – so what is a cash flow analysis? And what do companies need to bear in mind when analyzing cash flow? 

What is cash flow analysis? 

Cash flow is the movement of money into and out of a business. The cash received is referred to as inflows, while the money leaving the business is described as outflows. 

Cash flow analysis is the analysis of the company’s inflows and outflows, which can include operational, investment and financing-related costs. By analyzing current assets and liabilities, companies can gain a clearer understanding of how money is spent and received within the organization. This, in turn, can help the company ensure that liquidity is in the right place at the right time and take steps to address any shortfalls – for example, by reducing costs or seeking additional financing. Equally, cash flow analysis may help you identify opportunities to invest surplus cash more effectively. 

The information needed for a cash flow analysis can be found in the company’s Statement of Cash Flows, which includes details of the company’s Operating, Investing and Financing cash flows. In this blog, we will focus on cash flows arising from operations. 

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Why is cash flow analysis important? 

The inflows and outflows that arise from a company’s current assets are important because they are integral to the company’s working capital position. A company’s net working capital – in other words, the amount of money available to meet immediate costs – is defined as current assets (such as cash and accounts receivable) minus current liabilities (such as accounts payable and debts). 

Working capital is important because it is needed to cover the company’s short-term costs – without sufficient working capital, the company may not be able to meet all of its upcoming financial obligations. As such, the company’s working capital is an important consideration for corporate treasurers. To understand how operating activities affect the company’s working capital, and thereby identify and mitigate any potential risks, treasurers need to carry out cash flow analysis. 

How to analyze cash flow statement 

A cash flow analysis is carried out by analyzing cash flow statements. The cash flow statement – also known as a statement of cash flows – is a financial statement that details the cash and cash equivalents that are flowing into and out of the business over a period of time. The cash flow statement complements a company’s balance sheet and income statement, and provides information about the company’s liquidity and financial flexibility. It details cash arising from operations, investments and financing activities. 

Analysis of cash flow statement 

So how does cash flow statements analysis work? Where cash flow from operations is concerned, the cash flow statement details cash flows arising from operations, which can include a number of components: 

  • Accounts payable – money owed by the company to its creditors or suppliers 
  • Accounts receivable – money owed to the company by customers for goods and services 
  • Inventory – the materials held by the business for use during the production process, and goods that are either being prepared for sale or held for sale by the company. 
  • Debt/tax payments 

Cash flow analysis involves analyzing the sources and uses of cash. The cash flow analysis can then be used to drive cash flow improvements. For example, if a cash deficit is identified, the company may take steps to secure additional financing or improve the efficiency of the accounts receivable department. Identifying a cash surplus, meanwhile, could present opportunities to expand the business or offer suppliers early payment in exchange for a discount. 

Here is a simplified cash flow analysis example: 

Cash flows chart 

Cash and cash equivalents at the beginning of the period $78,000.00 

Net cash from operating activities $57,450.00 

Net cash from investing activities ($632.00) 

Net cash from financing activities $12,722.00 

Increase/decrease in cash and cash equivalents $69,540.00 

Cash and cash equivalents at the end of the period $147,540.00 


Cash flow analysis should also refer to the cash flow forecast in order to incorporate details of the company’s future cash position. Cash flow forecasting is a process that is used to estimate future cash inflows and outflows, and thereby predict the company’s cash position at a future date. The more accurately a company can predict its future cash position, the less of a cash buffer it will need to hold to accommodate any unexpected expenses. 

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Cash flow analysis metrics 

Beyond the basics, a number of additional metrics can be used as part of cash flow analysis, such as: 

  • Operating cash flow – the cash generated through the core business activities of the organization. Operating cash flow can be measured using the following formula: 
    Operating cash flow = net income + non-cash expenses + changes in working capital 
  • Free cash flow (FCF) – the amount of cash generated by the company after operating expenses and capital expenditures have been paid. Free cash flow can be calculated using this formula:
    Free cash flow = cash from operations – capital expenditures 
  • Days Sales Outstanding (DSO) – the average number of days taken to collect payment for sales. Calculated as:
    Days Sales Outstanding = Accounts receivable/total credit sales x number of days  
  • Days Payable Outstanding (DPO) – the average number of days taken to pay invoices. Calculated as:
    Days Payable Outstanding = (Accounts payable x number of days)/cost of goods sold 
  • Days Inventory Outstanding – the average number of days that inventory is held for before it is sold. Calculated as:
    Days Inventory Outstanding = (Average inventory/cost of goods sold) x number of days in period  
  • Cash Conversion Cycle – the number of days taken to convert investments in inventory into cash through sales. Calculated as:
    Cash conversion cycle = DIO + DSO – DPO 
  • Cash flow coverage ratio – a measure of the company’s ability to pay its debts using cash flow from operations. Calculated as:
    Cash flow coverage ratio = operating cash flows/total debt 
  • Quick ratio – a type of liquidity ratio and an indication of the company’s ability to pay off its short-term debt obligations. Calculated as:
    Quick ratio = (Cash + securities + accounts receivable)/current liabilities
    Cash flow analysis challenges 

Carrying out an effective cash flow analysis isn’t always straightforward – particularly if treasurers lack the automated tools they need to carry out effective analysis. If treasurers are managing their companies’ cash manually, it will be much more difficult to understand why a particular situation may have arisen. Likewise, the use of static key performance indicators (KPIs) that are measured infrequently will make it difficult to analyze cash flow in a meaningful way. 

One metric that can be used to good effect is the cash conversion cycle (CCC). The benefit of having the right technology available is that more sophisticated KPIs can be more easily accessed, which in turn results in more effective cash flow analysis. 

Using technology to reduce all types of float 

Technology has an important role to play when it comes to helping companies manage their cash flows more effectively. One notable benefit is the opportunity to use technology to manage the cash flow timeline more effectively.  

Cash flow analysis can be affected by a number of types of float that can arise, such as payment float – in other words, the period when a deposit made to a bank account has not yet cleared. Likewise, delays can arise while other processes have not yet been completed. 

Techniques such as electronic invoicing (e-invoicing) can reduce float, but they don’t eliminate it entirely as people will still pay based on their own company’s payment terms. Nevertheless, this type of solution can help to reduce the time taken to pay invoices. 

Real-time technology, meanwhile, can reduce information float – in other words, the time taken to share information once it has become available. By providing more visibility over the funds available, real-time technology can speed up the sharing of information within the organization. While this may be difficult using legacy technology, bank APIs can reduce information float by harnessing the batch processing of payments as well as the balance information available. 

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