How to Complete a Small Business Cash Flow Analysis

Blue ballpoint pen on a statement of cash flows with eye glasses and a calculator.

When it comes to the financial management of growing a small business, cash is king. However, when a gap between paying your suppliers and employees and receiving payment from customers occurs, maintaining a smooth operation can become a real challenge. The solution to this problem is cash flow management.

What is cash flow? The term cash flow refers to the movement of money in and out of your business. Having too little working capital can hamper your ability to cover payroll and pay suppliers on time. On the other hand, having too much cash on hand might indicate that you are in a strong position to make investments in additional inventory, new equipment or plans for expansion.

The secret to avoiding a negative cash flow situation and missed opportunities is to perform a cash flow analysis regularly.

What is a Cash Flow Analysis?

Conducting a cash flow analysis allows you to measure the amount of cash your business generates and spends during a specific period of time. Performing an analysis regularly helps you better understand where your money is going and how much cash you have available at any given time – it paints a clear picture of your company’s overall performance. To get started, you will first need to create a cash flow statement.

A cash flow statement is a financial statement that summarizes the amount of cash and cash equivalents entering and leaving your business. Your cash inflows and outflows will fall within three categories: operating activities, investment activities and financing activities.

Operating Activities 

This section encompasses the cash inflows and outflows from your business’ core daily activities. Operating inflows include income from sales and paid receivables. Operating outflows include money paid to suppliers, payroll, insurance, taxes (not related to investing or financing), etc.

Investment Activities 

This section refers to larger scale, long-term fixed assets. Inflows include the rent or sale of company equipment or property. Outflows include the purchase of business equipment, machinery, real estate or securities.

Financing Activities 

This section includes all debt and equity transactions. Inflows include all external business funding your company secures. Outflows include each payment made towards repaying your debt from financing.

Once you have recorded all relevant transactions on your cash flow statement, combine your final numbers from each section to arrive at the last line: your net cash balance. If the amount is greater than your opening balance, you have positive cash flow. If it is lower, you have negative cash flow.

3 Key Insights You Should Pay Attention To

The next step is to closely examine each line of your cash flow statement. As you scan the information, make sure you pay close attention to the following key points to get an accurate picture of the financial health of your business.

1.  Operating cash flow

Of course, your main business objective is to make a profit. Experiencing a few periods of low or negative cash flow is not necessarily a red flag, but you do need to maintain a positive cash flow from operations to ensure a sustainable venture. If you notice consecutive periods of poor cash flow from operations, it might indicate that it is time to adjust your business’ budget and spending patterns.

2.  Accounts receivable

Your business may appear profitable at first glance, until you factor in uncollected debt from your customers. Outstanding accounts receivable can significantly reduce your company’s overall cash flow. If you realize your accounts receivable keeps increasing each period, focus on improving your invoicing process to speed up collections and unlock cash sitting in unpaid receivables.

3.  Net cash balance

Your company’s net cash balance is an important indicator of the financial health of your business. It shows you just how much liquidity you have, or don’t have. By continuously monitoring your cash inflows and outflows, you not only gain a better sense of your financing needs, but also a clearer picture of your small business’ growth potential.

How to Use Cash Flow Analysis Information

The more frequently you analyze your business’ cash flow – and the longer you continue to do so – the more you will learn from it. For example, have you identified several clients that consistently pay late or simply avoid paying entirely? Did you notice that your cash flow stays positive the majority of the time, but slips into the negative during the last week of every month?

With the information gleaned from your cash flow statement, you can then figure out ways to cover cash shortfalls. The first step is to find ways to cut costs and increase your income. If your efforts do not improve cash flow as quickly as you need to, consider partnering with a factor. An invoice factoring company (factor) can help you turn unpaid accounts receivable into immediate capital – you can boost cash flow and solve the late-paying customer dilemma.

How Invoice Factoring Can Improve Cash Flow

What is invoice factoring? The process involves selling your business’ unpaid invoices to a factoring company at a discount. The factor will then quickly provide an advance and take on the responsibility of collecting payment from your customer. Once your customer pays the invoice, your business will receive the remaining amount, minus a small factoring fee.

This increasingly popular financing tool ensures you have the cash you need to operate smoothly, cover payroll and purchase new equipment and supplies. Factoring also provides the flexibility you need to say “yes” to new jobs, fulfill multiple large orders and pursue additional opportunities. Before committing to work with a factoring company, just make sure they will be a reliable business partner and that they understand your business type and industry.

Security Business Capital Invoice Factoring Services

Security Business Capital’s invoice factoring services allow you to use unpaid invoices to secure the cash you need quickly and easily – in as little as 24 hours. Based in Midland, Texas, Security Business Capital is a premier invoice factoring company with years of experience. Oil and gas, staffing, manufacturing, distribution, transportation, and business services are just a few of the industries that regularly use our solutions to generate cash on hand.

If you have any further questions about invoice factoring or how our services work, contact us today for a free quote and/or consultation.