How to perform a quick cash flow analysis in 4 steps

The purpose of a cash flow forecast or analysis is to predict the amount of cash that will pass in and out of your business over a given period of time.

5 min read

Achieving positive cash flow is one of the most sought-after goals of any business. We’ll explain why that is and how you can analyse your cash flow.

What is cash flow analysis and why do you need to do it?

When it comes to measuring the health of your business, fewer metrics are more telling than cash flow. A healthy cash flow is necessary not only to perform daily operations, but it means you can settle debts, pay expenses and reinvest in the business to promote future growth.

The purpose of a cash flow forecast or analysis is to predict the amount of cash that will pass in and out of your business over a given period of time.

Ultimately, your forecast should provide an indication of how much cash will be accessible for the following:

  • Operational activities: Cash coming in from day-to-day sales and the outflow of funds to cover those activities, for example, payroll, supplier payments and taxes;

  • Investment activities: Assets such as buildings or equipment – the purchase and sale of them – can have a drastic impact on a business’ cash flow;

  • Finance activities: Business borrowing, issuing stock to shareholders and distributing dividends all fall into this category.

Committing to monitoring your inflow and outflow of cash ensures your business stays afloat.

It can help prevent a cash flow crisis and encourage steady business growth. There are both simple and complex versions of a cash flow forecast. For the purpose of this article, we’re going to keep things as simple as possible so you can get a quick indication of how your cash flow is looking.

Read more: How consulting business Revealed Resources mastered their cash flow

How often should you do a cash flow forecast?

Short answer — the optimal scenario is weekly.

If you can forecast your cash flow on a weekly basis, this will help you keep your finger on the pulse when it comes to cash in the bank. Weekly forecasting also captures granular movements that can often be overlooked if you only rely on using monthly, quarterly or even yearly forecasting.

Performing monthly or longer periods of forecasting is still a great way to plan strategic activities in the future. It can also give you insight into what kind of cash you need to have in order to execute some of the grand ideas you have for the business.

Create your cash flow forecast in 4 easy steps

Creating a cash flow forecast is not as difficult as it sounds. Businesses can generate their own by following these four simple steps.

Step one:

Check your bank balance. This figure should be noted and jotted down as the starting point for your cash flow forecast. For instance, if you have a current bank balance of $20,000, use this figure for step one. If your starting numbers are off, it will affect the entire forecast.

Step two:

Factor in the total of your cash inflow to your bank balance from step one. Cash inflow is any money that is coming into your business. This can include deposits from the sale of products or services, investments, and any financing currently in place. As an example, let’s say your cash inflow is $10,000 for the next week.

Step three:

Deduct the total of your cash outflow from the total sum from steps one and two. Cash outflow is the fancy way of saying the amount of money that is leaving your business. Outflows include the costs associated with the day-to-day operations of the business. Wages, salaries and benefits, supplier payments, and bank loan payments are all examples of outflow. If your estimated cash outflow is $15,000, deduct it from $30,000 (which is the total of the money you have currently in your bank account and your weekly cash inflow).

Step four:

Take the resulting figure from steps one, two, and three. This is your net cash flow. In our example, the net cash flow is $15,000. Ideally, this will be a positive figure. If it is a negative number, then your business does not have adequate cash flow, which must be addressed immediately.

It is recommended that you review your business’ cash flow position weekly.

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