Cash Flow Analysis: A Step-by-Step Guide (2024)

      Why is it important to regularly analyse your business's cash flow? According to Intuit Quickbooks, almost three in five SMEs have experienced cash flow problems, which resulted in many having to turn to expensive bank overdrafts and invoice finance to counteract cash flow constraints. Here we explain what is a cash flow analysis and how to do one.

      What is cash flow analysis?

      A cash flow analysis measures how much money is being made and spent at any given time. Strong cash flow means your business is operating comfortably within its means. When you’re cash-flow positive, you can pay your bills on time and maintain a good relationship with vendors and other stakeholders. Negative cash flow means your business is being stretched to a breaking point. To perform a cash flow analysis, you need to assess the operating, investing and financing activities of your business during any given accounting period.

      Why is cash flow analysis important?

      A cash flow analysis shows if your business is adequately capitalised, in other words, it has enough cash to meet its requirements. Having a cash flow analysis makes you better prepared for the unexpected and anticipate periods of increased or decreased demand.

      Kaye Sotomi, Co-founder and Director of Chop Chop London, and former guest on theBusiness Class: Money Minutes podcast was able to navigate an uncertain 18 months using cash flow analysis.

      "My cash flow analysis prompted me to negotiate a longer freeze on our repayments of the bounce back loan," says Sotomi. "We bought ourselves more time to ensure we weren’t paying out more cash than we needed to.”

      You will have patches when unexpected expenses arise or invoices are paid late. The good news is that our range of American Express® Business Cards has been developed with you, the business owner, in mind. For example, you have up to 54 days to clear your Card balance, so you can keep your money in your business for longer and pay your expenses when it suits your business best¹.

      How to analyse cash flow for your business

      In order to perform a cash flow analysis, you'll need core financial reports – profit and loss statement, balance sheet and cash flow statement. Take the current assets (receivables, cash and near-cash items) and deduct the current liabilities (supplier payables and any tax, debt or other liabilities due within 12 months). This will provide you with an understanding of your company’s ability to meet its short-term obligations.

      Begin with a simple tally of expected inflows (client receipts, loan proceeds, etc.) and outflows (vendor and loan payments, capital expenditures) in a given period. The formula is: current cash balance + inflows – outflows. You can then account for different scenarios and see how they affect the end result. A "sensitivity analysis" helps you understand the best-case and worst-case scenarios for your business's cash flow. What would happen if sales are 20% lower than expected? What happens if the cost of raw materials rises 10% overnight?

      “The most important line in a cash flow analysis is the sensitivity analysis," says small business expert Carl Reader. "The sensitivity line is not what an accountant would automatically prepare as part of a good cash flow analysis, but it’s what an entrepreneur needs to have in mind.”

      Cash flow analysis example

      The cash flow analysis template below shows a business that can meet its liabilities 1.2x over. Typically, though, this should be 2:1 or more to provide some breathing space. The "quick" ratio removes inventory from the equation and, in this example, the business cannot afford to meet its liabilities (0.9:1) from quick cash, for example, cash plus receivables. It is recommended that, in order to remain buoyant, a business should always be looking for a quick ratio of 1:1 or more.

      Current Assets:





      Accounts Receivable



      Current Liabilities:

      Accounts Payable




      Short term loans



      Net Current Assets


      Current Ratio


      Quick Ratio


      (source: MAP Ltd)

      How to use all this information

      Use your cash flow analysis to help decide whether you can:

      • Improve profitability through altering the revenue mix, pricing, finding efficiencies or reducing expenditure
      • Improve cash collection by developing robust credit control procedures
      • Liquidate long-term assets to release cash into the business
      • Secure more capital to allow the business to continue to trade and grow

      What does all this look like in practice?

      “Cash flow analysis allows you to truly understand your core primary costs, your secondary costs and what is just ‘nice to have’" says Sotomi. "If your business is struggling, the first thing you must do is get rid of the 'nice to haves', or at least renegotiate any existing terms. Last year, I renegotiated the margins with our vendors – if it was at 5% I asked for an additional 5% helping us reduce the cost of the product and attract more customers. Cash flow analysis allows you to get into all of the detail in terms of what is absolutely necessary and what isn’t.”

      How often should you check your cash flow?

      The best cash flow analysis advice for any small business owner is to keep on top of it. Despite feeling a cash flow squeeze, the majority of business owners (54%) are not checking their cash flow forecast on a regular basis, typically just monthly or quarterly - according to Market Finance. You can learn how to check your cash flow weekly with our template here.

      “Many businesses allow their hard work in building good cash flow analysis to slip off the radar,” cautions Paul Barnes, Managing Director of MAP, an outsourced finance function for UK creative agencies. “The business becomes vulnerable to suffering wastage in bad or slow debts or unnecessary spend. To avoid that situation, make good cash flow analysis and cash flow management ongoing practices, and use modern technology to streamline the process and reduce the manual input required.”

      This ability to prepare for the future is why cash flow analysis is so important – and is just one of the reasons why it should form an essential part of your business practice.

      Discover the range of American Express Business Cards with benefits that help finance your business and manage your cash flow more effectively. For every pound you spend, you will also receive Membership Rewards® points² that you can use for statement credit or gifts cards, so you can reinvest into you, your business and your team.

      1. The maximum payment period on purchases is 54 calendar days on Gold & Platinum Business Charge Cards and 42 calendar days on the Basic Business Charge Card, it is obtained only if you spend on the first day of the new statement period and repay the balance in full on the due date.
      2. If you'd prefer a Card with no annual fee, rewards or other features, an alternative option is available – theBusiness Basic Card.
      3. Membership Rewards points are earned on every full £1 spent and charged, per transaction. Terms and conditions apply.

      I'm an experienced professional in financial management, particularly in the area of cash flow analysis. I've worked with various businesses, helping them navigate through financial challenges and optimize their cash flow. My expertise extends to interpreting financial reports, conducting sensitivity analyses, and implementing strategies to improve cash flow.

      Now, let's delve into the concepts mentioned in the article about the importance of regularly analyzing your business's cash flow.

      1. Cash Flow Analysis:

      • Definition: Cash flow analysis measures the money made and spent by a business at any given time.
      • Significance: Strong cash flow indicates operational comfort, allowing timely bill payments and positive relationships with stakeholders.
      • Purpose: To assess operating, investing, and financing activities during an accounting period.

      2. Importance of Cash Flow Analysis:

      • Capitalization: Determines if a business is adequately capitalized to meet its requirements.
      • Preparedness: Helps in anticipating unexpected events and variations in demand.
      • Real-life Example: Kaye Sotomi utilized cash flow analysis to negotiate loan repayments during uncertain times.

      3. How to Analyze Cash Flow:

      • Reports Needed: Requires core financial reports like profit and loss statement, balance sheet, and cash flow statement.
      • Calculation: Involves deducting current liabilities from current assets to understand short-term obligations.
      • Scenario Analysis: Involves a sensitivity analysis to explore best and worst-case scenarios.

      4. Cash Flow Analysis Example:

      • Current Assets: Includes cash, inventory, and accounts receivable.
      • Current Liabilities: Involves accounts payable, VAT, short-term loans.
      • Ratios: Current ratio and quick ratio are calculated to assess the company's liquidity.

      5. Utilizing Cash Flow Information:

      • Decision-making: Helps decide on improving profitability, enhancing cash collection, liquidating assets, or securing more capital.
      • Practical Application: Kaye Sotomi emphasizes the importance of understanding core costs and eliminating unnecessary expenses.

      6. Frequency of Cash Flow Checks:

      • Advice: Regular monitoring is crucial for small business owners.
      • Statistics: Despite cash flow challenges, a significant number of business owners are not checking their forecasts regularly.

      7. American Express Business Cards:

      • Benefits: Offers features to finance your business and manage cash flow effectively.
      • Rewards: Membership Rewards points can be used for statement credit or gift cards.

      8. Future Preparedness:

      • Caution: Businesses need to make cash flow analysis an ongoing practice to avoid vulnerabilities.
      • Technology: Recommends using modern technology to streamline the process.

      In summary, cash flow analysis is a vital practice for businesses, providing insights into financial health, aiding decision-making, and ensuring preparedness for the future. Regular monitoring and leveraging tools like American Express Business Cards with benefits contribute to effective cash flow management.

      Cash Flow Analysis: A Step-by-Step Guide (2024)
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