Why Cash Flow Analysis Must Be Mastered

Cash Flow is King

Think about that statement for a second. What does it mean to you? Some of my wandering thoughts are my employers cash flow and I hope it doesn’t run out. There’s my cash flow that I think about more when looking at my budget. There’s the government shutdown we just endured.

Cash Flow is King because if you have no cash then you’re broke. If you’re spending more than you make, then you’re broke or will be shortly.

For a company, cash = business.

Insufficient capital is the No. 2 reason small businesses fail.

This is why Cash flow analysis is an important skill for anyone in business or finance. Working on a project? Most likely involves some finances that you’ll need to keep track of. Cash flow analysis identifies and labels the movement of money in and out of a business or project, which helps a company identify cash flow problems and cash flow opportunities. This helps a company plan for future prosperity and avoiding bankruptcy.

To begin a cash flow analysis one must start with a cash flow formula

Basic Cash Flow Formula:

  • Identify Cash Inflow: Business, investments, financing
  • Identify Cash outflow: Expenses, Operating costs and interest
  • Ending Cash balance: Add the cash inflow, then subtract the outflow.

It’s not complicated.

Benefits of a Cash Flow Analysis:

  • Cash Flow helps identify the value of a company
  • Knowing the cash position of a company greatly helps in determining how much money needs to be borrowed
  • Make use of surplus cash for company growth or investment
  • Identify areas where the company can cut back or save money

Disadvantages of Cash Flow Analysis:

  • Does not consider future growth
  • Interpreting data can often times be challenging
  • Is often mistaken for other statements used to analyze business

This InfoGRAPHIC says it all

 Cash-Flow-infographicFeatured image by http://dribbble.com/ballardstudio

Comments

  1. It is hard to keep moving when you don’t have the cash on hand. Establishing your business or family finances around the idea of spending less than what is coming in, seems so un-common. Even though those that do have set themselves up for victory. Great stuff John!

  2. Cashflow is certainly the lifeblood of business. I have been on the receiving end of a dwindling cash flow small business and its not a pretty scene…you borrow from whoever can listen to your story loan-sharks included. Long story short, it wasn’t a happy ending.
    The sooner entrepreneurs realize this the faster they can establish systems to safeguard a constant flow of cash.

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