When It Comes to the Financial Health of Your Business, How Healthy Is Your Cash Flow?

Cash Flow Analysis – Complete Guide For Business Owners
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How To Analyze Cash Flow Statement As An Entrepreneur

In this section, I’ll share how you can analyze your cash flow statement.

You will also learn how to find cash flow problems and opportunities for cash flow creation just by looking at your cash flow statement.

The knowledge you’ll get by analyzing your cash flow statement will safeguard you from a potential cash flow collapse and move you in the direction of cash flow creation.

I’ll start with the basics and explain three main components of a cash flow statement divided across cash flow from operations, investing activities, and financing activities.

To help you analyze your cash flow statement yourself, i’ll show you how it is done step by step with an example of mega profit limited.

We’ll use this template for this purpose.

Download this template to follow along.

I have followed a simple process, and you can follow it even if you are a number phobic.

The ability to look at your cash flow and find out what is going on with cash flow in your business is a superpower. With this superpower, you will keep moving forward in business because cash flow problems won’t hold you back.

And this section teaches you how to get this superpower.

Let’s get started by understanding what cash flow analysis is.

What Is Cash Flow Analysis?

In the most basic sense, cash flow is the movement of money in a business.

It refers to both the money that comes into the business and the amount business spends. Later, all this information is listed in a “cash flow statement” file.

Many people consider the cash flow to be the total income of companies. It also accounts for the depreciation of the asset a business has. However, this way of calculating the cash flow is often inaccurate.

Most of the time, you will get a figure somewhere around the range of operating cash flow.

When running a business, every little bit matters, so even this tiny deviation can cost you later.

However, the most beneficial aspect of a cash flow analysis is that it lets a business owner know of many potential financial issues before they occur.

In short, the cash flow analysis shows the financial health of a business. The most accepted format for viewing this information is the cash flow statement.

Cash flow analysis helps business owners decide if they should change their financial situation.

Why Is Cash Flow Analysis Important?

How do you check who is winning and losing in any sport?

You check the score.

Let’s say you watched a tennis match between anna and beth.

You joined long after the match had started and could sit through the last couple of games in the final set.

Anna won the match.

Now, you wanted to know why she won. So, you go and check out the analytics.

No of 1st serve in

No of 2nd serve in

No. Of breakpoints won.

It’s the same in business.

There are wins, and there are losses.

And, you want to know why?

It might be easy to understand for a nascent business where there isn’t much going on.

But it’s not that easy in a business with lots of moving parts.

There are blind spots.

To uncover those blind spots, and check the health of a business, cash flow-wise, you do a cash flow analysis.

Through the analysis, you look for trends/irregular activities/patterns/spikes (t.i.p.s.) of cash in your business.

Your ability to read a cash flow statement to spot t.i.p.s. Tells how well you can analyze cash flow – it makes the difference between your ability to analyze cash flow or not.

When you don’t know how to analyze cash flow, it’s like seeing through foggy eyeglasses.

How Does Cash Flow Analysis Help You As An Entrepreneur?

According to a survey done by score.org, 82% of businesses fail due to a poor understanding of cash flow.

You will clearly understand cash flow and avoid business failure when analyzing cash flow.

So by doing a cash flow analysis, you’ll prevent failure.

You see, most entrepreneurs follow bank balance accounting. They look at their bank balance and make crucial financial decisions. They make these decisions without considering a dip or increase in sales or costs, current receivables, and payables.

It leads to “oh shit- I haven’t got cash for this” moments. You can avoid such moments and the undue stress that comes with it by analyzing your cash flow.

When you perform a cash flow analysis, you can answer your questions like:

  • how do I get a grip on my cash flow?
  • how to get cash flowing when there is none?
  • how to manage the flow of cash better?
  • is my cash balance healthy or not?
  • why is my profit different from my cash flow?

To find out the answers to these questions, do periodic cash flow analysis.

It is the only way to have cash flow clarity in your business.

When analyzing cash flow, evaluate cash flow from 3 types of activities.

  • cash flow from operating activities.
  • cash flow from investing activities
  • cash flow from financing activities

Let’s look at each one by one.

Cash Flow From Operating Activities

The operating cash flow listed on the cash flow statement is the total cash generated from the trading activities of the business.

It is the most accurate cash flow statistic of a business. Many investors use operating cash flow to determine if they should invest in the said business or not.

Operating cash flow includes all the irregular expenditures, accounts payable, and accounts receivable assets. It paints a mathematically accurate picture of the financial condition of a business by highlighting the overall situation.

It shows how much cash a business generates from profits, which serves as an engine to run and grow your business.

Cash Flow From Investing Activities

Investment cash flow deals with long-term assets.

Cash flow from investing activities considers assets like heavy vehicles, machinery, buildings, and other tools one needs to run their respective businesses. These are considered “hard assets.”

This type of cash flow is associated with the sale or purchase of investments in businesses like land or equipment.

As you likely know by now, when you buy something, there is cash outflow, and when you sell, there is a cash inflow.

Cash Flow From Financing Activities

This one is associated with loan payments you receive or loans you repay. Again, this can create cash outflow and inflow, depending on whether you get a loan or pay it back.

Financing cash flow lists all the financing sources of a company. It includes all the places a business owner borrows, loans, or procures money from to run the business. It also records the cash used to pay back debt or loans.

In technical terms, the financing cash flow represents all the equity and debt, e.g., insurance, loans, shares, bonds, etc. It is a crucial part of the cash flow statement because it represents financial security.

now that you know the basics, let’s check out the stories of some entrepreneurs.

Cash Flow Analysis Myths/mistakes
Lessons Learned Through Cash Flow Stories Of Entrepreneurs

Here are some cash flow stories of entrepreneurs.

These entrepreneurs made cash flow analysis-related mistakes. Below, i am sharing the lessons they learned and how they resolved their challenges.

Chris’s Story – Not Able To Spot Hard-earned Cash Leaks

Who he is

Chris runs a website agency business, and he wanted to grow it.

What did he do, and what went wrong?

His business grew well, and he invested in various software and subscriptions. He didn’t realize the cash leaks in the business.

What was the biggest cash mistake he made, and what was the misconception he had?

Chris’s mistake was running the business without analyzing cash flow to see trends, irregular activities, patterns, and spikes (tips) for a long time. If he had done that, he would have seen software subscriptions he no longer used, the cash he could have invested elsewhere.

Lessons learned

Benjamin franklin said, “even a small leak can sink the ship.”

Chris had too many unnecessary regular expenses, so many leaks that needed to be plugged.

He realized he needed to manage outgoing costs to ensure he only spent money on essential things to run his business smoothly.

Now he asks himself regularly, “do i need this expense in my business to run smoothly or not?” If the answer is yes, he keeps or else doesn’t.

Chris also realized he made the mistake of not reviewing cash leaks.

His advice to other entrepreneurs is to do regular cash flow analysis to spot any cash flow tips and take action as necessary.

Olivia’s Story – Not Leading With A Profitable Product

Who she is

Olivia runs a freelance organizational leadership program. She has been in the business for over ten years. She has a lot of repeat clients and a lot of work to do. Being a creative entrepreneur, she introduced more product lines to serve her clients.

What did she do, and what went wrong?

She was saying yes to every sale that came her way. Although she was very busy with her work, she was sick of seeing revenue going down the drain, and on top of that, she felt like she got a slap in the face with a massive tax bill.

What was the biggest cash mistake she made, and what was the misconception he had?

Her biggest mistake was not leading with her most profitable products. A business without a path to profit is just more work.

Lessons learned

Olivia worked up to 16 hours a day to meet her client’s expectations.

She was busy and wasn’t seeing much money in the bank.

It’s not unusual to find busy entrepreneurs who work hard every day and don’t have much to show for it at month-end.

Such entrepreneurs make big mistakes of not knowing or not pushing their most profitable products.

See, it’s no good if you go out there, work long hours and put all this energy into your business without any significant return.

You can change it by focusing on your profitable products and dropping those that get you revenue but no profits.

Robert’s Story – Lack Of Financial Know-how

Who he is

Robert is a Facebook ads coach who helps his clients win with paid media. Rory is obsessed with making facebook ads work for his clients and does that very well.

What did he do, and what went wrong?

Robert only looked at the value of the project without thinking much about the time commitment. He realized that it took way longer to provide the service for some projects, and sucked his time and energy.

What was the biggest cash flow management mistake he made

His biggest cash flow mistake was a lack of financial know-how. He was able to see sales by projects but not profit by projects.

Running a business without knowing these details proved too costly for him. He could have invested his time, his most valuable resource, on profit and cash-generating activities.

Lessons learned

He needed to do cash flow analysis, which requires financial know-how to have cash flow clarity.

This was not the only challenge for rory.

Many creative entrepreneurs think they could have managed the financial side of their business well if only they had an mba or an accounting or finance degree.

And, because they don’t have those degrees or an mba, they keep running from numbers in their business.

Good financial know-how in business means more than knowing how much tax you need to pay.

Financial know-how gives you clarity and confidence about where you are right now in your business in terms of sales, profit, and cash position.

And, if you are not where you want to be, financial know-how tells you what to do about it to get to where you want to be by developing a financial growth strategy.

Many entrepreneurs talk about business strategy. I believe it’s pointless without having a financial strategy in place. Without financial competence, you can’t develop a financial strategy. Because you need cash to run the business and implement your business strategy. So successful implementation of your business strategy needs financial know-how.

If you think your financial know-how is not up to the mark, invest time and resources developing it. It will pay you dividends in the future. Work with a coach or an established expert if you have to for this.

The ability to grow your business profitably and sustainably requires financial know-how.

Otherwise, you are just leaving your success to chance, which rarely works out.

How To Analyse Cash Flow Statement As An Entrepreneur

Do you get confused analyzing the cash flow statement?

Do you get confused with cash flow analysis paralysis?

and

are you not able to move forward because you don’t know what’s going on with the cash flow in your business?

Then this section is for you.

Because in this section, i’ll share how to analyze a cash flow statement as an entrepreneur and go from cash flow confusion to cash flow clarity.

I’ll also share how you can safeguard yourself from a potential cash flow collapse to cash flow creation.

You’ll learn how to analyze a cash flow statement as an entrepreneur step by step.

So, let’s dive in.

I already shared in the beginning that a cash flow statement is divided into three components:

  • cash flow from operations
  • cash flow from investing activities
  • cash flow from financing activities.

Then there’s a direct method of preparing a cash flow statement and the indirect method of cash flow statement.

And there are specific rules about which cash flow items go where.

You may find it all boring. And, it doesn’t have to be this way because you are not training to be a finance professional.

You just want to be a financially savvy entrepreneur who knows how to analyze cash flow, make intelligent financial decisions, and grow your business.

You don’t need to get bogged down with details like three components of cash flow, direct and indirect, and so on.

So, going forward, you can follow this quick and straightforward 5-step process that you can use to analyze cash flow statements. you can do this even if you are a number phobic.

Step 1 | Confirm Key Balances

Check opening and closing bank balance, and make sure that total receipts and total payments agree with the bank statement. Otherwise, you will be analyzing the wrong information in the cash flow statement in the first place.

If you don’t have a cash flow statement template already in hand. Use the one i have shared in the description below and make it your own.

If the key balances do not agree, you need to fix them first.

In mega profit ltd, you can see the opening and closing bank balances and total cash receipts and payments agree between the bank statement and the cash flow statement.

We have a good starting point.

Let’s move on step number 2.

Step 2 | See The Patterns Of Cash Inflow (shishir To Provide Image)

What is the cash inflow pattern?

Which products are bringing more cash flow, and which ones are doing the opposite?

This pattern is related to actual commercial activities. Remember, numbers do not appear out of a vacuum. They are the result of a commercial decision between you and your clients.

So use your cash flow statement to compare the cash inflow by product type. Also, look at the total cash inflow and compare it to what it was last year, at the same time. It tells you how your business generates cash compared to the previous period.

What did you notice? Is cash inflow increasing or decreasing?

Although the business may have received cash from other sources such as

  • owner investment
  • government grants
  • bank loans

The main focus here is cash received from clients.

In this example for mega profit limited, cash received from mastermind is bigger than any other product line.

Based on this information, wouldn’t it make sense for this business to invest time, money, and energy in getting more mastermind clients?

You see, in the same way, you can analyze your cash inflow and use the information to make an intelligent commercial decision.

So now it’s your turn. I want you to pause this video and go ahead and analyze the cash inflow and see what jumps out of the page for you. You may have some light bulb moments. Like which products are more cash-generating and which ones you probably need to let go of because they are sucking up your time and energy without any significant return.

Analyzing cash inflow will reveal

  • top cash-generating products that will clarify where you need to focus
  • efficiency to transform sales invoices to cash in the bank
  • average cash inflow in any month
  • which customer or customer segments are you profitable who pays more for you giving you less time and energy
  • trend of cash inflow – is it increasing or decreasing.

Step 3 | See The Patterns Of Cash Outflow

Once you have analyzed cash inflow, now it’s time to turn to analyze cash outflow.

We follow the same process as we did with cash inflow, comparing spending patterns for the last three months and comparing with last year’s figures at the same time. This way, we are comparing like with like.

So compare across the seven categories and see what’s the trend. Are there any types of costs or expenses increasing or decreasing? And why is that? Relate this to the commercial decision that took place.

Now you will be thinking, am i getting roi from cash spent?

When you analyze cash outflow as a resource, you use it to generate more sales and profit. You try to justify yourself whether you are getting value for money. That is powerful.

In the case of mega profit limited, you can see business has spent more on google in previous months and recently on fb ads. You’ll notice fb ads are helping bring more cash inflow.

Now, wouldn’t it make sense for this business to focus on fb ads right now completely rather than google ads?

This is the power of analyzing cash flow, it gives you clarity.

Remember this:

“without clarity, there’s no focus. Without focus, there’s friction in your head about what to do next, becoming financially paralyzed.”

Step 4 | Analyse Net Cash Flow Movement

Net cash flow movement tells how much cash is generated from your profit.

Let’s say in a month, a business made:

$100 in sales

At $60 in costs

And $20 in expenses

and generated a profit of $20.

From a cash flow point of view:

Let’s say business only collected $60

Cash inflow – $60 (balance $40 left to collect)

Cash outflow – costs- $60

Cash outflow expenses – $20

net cash movement in the month = $60- $60-$20 = – $20

You can see, profit and cash flow, they are not the same. This business generated $20 in profit and -$20 in net cash flow.

You can keep the business going by having a solid cash flow.

You have strong cash flow by increasing net cash flow movement on a month-on-month basis.

In the case of mega profit limited, you can see the business has been generating positive net cash flow month by month, and it’s a very healthy business.

Now it’s your turn to go back to your cash flow statement to analyze your net cash flow movement for the last three months – and ask yourself these three questions:

  1. is it positive or negative?
  2. which one is greater in the monthly profit or cash flow?
  3. which has been greater in the last three months? Net accumulation of profit or cash flow?

If you have been making profits, but it doesn’t reflect in your bank balance, focus first on improving the cash flow that i have shared here.

Step 5 | Notice Closing Bank Balance Trends

Your closing bank balance is your now money.

If no one pays you, from today onwards, for a few weeks or months for whatever reason, you want to analyze the cash flow situation to prioritize spending in your business.

I always recommend that if their cash flow balance doesn’t cover the overhead expenses, including tax payments for the next 12 weeks, it’s not a healthy cash position.

See the trend of closing bank balances for the last three months.

In the case of mega profit limited, the closing cash bank balance has been consistently increasing. The balance of $32,825 covers the next 12 weeks of fixed overhead expenses (rent, salaries, and office expenses) of a total of $4,285 tax payments of $2,000.

Now it’s your turn to see your business’s closing cash balance trend. Is it increasing or decreasing? Oh, one more thing. Does the cash balance cover overhead expenses for the next three months?

There you have it.

It is a simple 5-step process to analyze your cash flow and find the info to help you make intelligent decisions to grow your business and safeguard it against future cash flow problems.

Step 1 Confirm key balances
Step 2 See the patterns cash inflow
step 3 See the patterns of cash outflow
Step 4 Analyze net cash flow movement
Step 5 Notice closing bank balance trends

Learning how to analyze the cash flow is crucial if you want it to stay afloat.

Every year many small business ventures fail due to a lack of cash flow management.

That’s why I’ve explained what cash flow analysis truly means and how you can make use of it to understand your business.

Shishir Khadka, qualified as a chartered certified accountant in 2009. He is the creator of cashflow hub– the world’s most comprehensive cash flow resource online and is one of the UK’s leading cash flow specialist who helps busy business owners and entrepreneurs generate more profit and create consistent positive cash flow without over relying on getting new sales.

He has delivered a masterclass to a global software Zoho’s audience to create consistent cash flow. He has written articles for floatapp– one of the leading cash flow software and has also been featured in the major publications such as Independent. He has been sharing his learning and insights on his youtube channel.

He wrote about his learnings from helping an e-commerce client scaled the business cash flow positive from £500k to £1.6m in four years in “The Three Key Obstacles to Faster Growth: How You Can Overcome Them Using Cloud Accounting.

In his career spanning 18 years as the cash flow specialist, he has helped businesses of all sizes, ranging from £40K to £40M.

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