How to do a cash flow analysis step-by-step

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In seeking to understand the financial health of your company, few metrics are as important as cash flow—the way money moves in and out of your company as income and expenses. 

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Knowing how cash flows through your business empowers you to make more strategic decisions about everything from your inventory and supply chain management strategies to your expense policy to your sales cycle and more. It’s also a critical KPI for potential lenders and investors, who often use it as a proxy for stability and risk. 

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But how do you actually go about determining your company’s cash flow and monitoring it over time? Through a process known as cash flow analysis.

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Below, we take a closer look at what cash flow analysis is and the steps that it involves. We also discuss the key insights that cash flow analysis can offer your business and answer other common questions you may have as you start analyzing your business’s income and expenses. 

What is a cash flow analysis?

A cash flow analysis is exactly what it sounds like: A process for analyzing how cash flows through your business as income and expenses over a given period of time. A positive cash flow indicates that your company has enough money to meet its short term operating expenses with money left over to pay down debt or grow the business, while a negative cash flow may signal liquidity issues. 

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Cash flow analysis involves tallying up all of your business’s various sources of revenue and expenditure. This data is ultimately used to prepare a cash flow statement, a financial document that informs your analysis. 

Types of cash flow

From an accounting perspective, cash flow comes in three main types, each of which must be accounted for in a cash flow analysis:

• Cash flow from operations (CFO): Also known as operating cash flow, CFO includes all income and expenses related to your business’s core operations. 
• Cash flow from investing (CFI): Also called investing cash flow, CFI includes all income and expenses related to investment activities that your company undertakes, such as the purchase or sale of assets or property.
• Cash flow from financing: Also called financing cash flow, CFF involves any income and expenses related to your company’s issuing of debt or equity, including interest payments, stock buybacks, and dividend payments. 

What is a cash flow statement?

A cash flow statement is a financial document that summarizes the cash flow of a company or other organization—including its expenses and income related to operating activities, investing activities, and financing activities—over a period of time. Cash flow statements are a key part of cash flow analysis. Potential investors and lenders will often use a business’s cash flow statement to inform investing and lending decisions, respectively. 

Is cash flow the same as profit?

No. While cash flow and profit are often discussed side by side, they are not the same metric, and confusing one for the other can lead to trouble.

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Profit refers to how much money a business has left over after subtracting operating expenses from revenues. It can be broken out in a number of ways, including as gross profit, operating profit, and net profit. 

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Cash flow, as discussed above, simply reflects how much money is moving in and out of a business. A positive cash flow indicates that the business has more money moving into it than out of it during the reporting period; a negative cash flow indicates that a business has more money moving out of it than into it during the reporting period. Neither of them directly translate over into a profit or a loss.  

How to do cash flow analysis

While conducting a cash flow analysis may sound intimidating, the good news is that most of the math involved is basic arithmetic. Far more important than math skills is ensuring that you have accurate and complete information to inform each of the steps below.

1. Select a reporting period

The first step in performing a cash flow analysis is to select a reporting period that your analysis will cover. While there are no hard and fast rules for what this reporting period should be, most public companies perform cash flow analysis quarterly. You can also perform your analysis monthly, annually, semi-annually, or according to any other schedule that makes sense for you.

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Cash flow analysis offers its greatest insights when it is performed regularly over the long term, as this makes it possible to identify trends in cash flow over time. With this in mind, it’s important to commit to whatever reporting schedule you select. 

2. Find your starting balance

In order to determine how cash moves through your business, you’ll need to know the starting balance for the reporting period. This will include all of the cash and cash equivalents that your business had on hand at the start of the period. 

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If you are analyzing cash flow on a quarterly basis, you can find your starting balance on the income statement for the same period. If you are using a different reporting schedule, you may need to calculate it by tallying up the assets in whatever accounts (checking, savings, money market, CDs, etc.) your business holds. 

3. Catalog all of your income sources

Next, you’ll need to compile a list of all of your business’s income during the reporting period. This will naturally include any revenues that your business earned from the sale of goods or services. But it should also include things like:

• Interest earned from savings, CDs, bonds, etc.
• Proceeds from the sale or maturity of investments
• Proceeds from the sale of equipment, property, or IP
• Newly-issued debt 

4. Tally up your business expenses

Once you’ve got your list of income, you’ll need to complement it with a list of all your business expenses during the period, including those related to:

• Employee salary and wages
• Purchases of inventory, supplies, and materials
• Purchases of assets, property, and investments
• Taxes (income, sales, etc.)
• Depreciation and amortization
• Sales and marketing activities
• Repurchase of outstanding company equity
• Dividend payments to shareholders
• Interest payments to lenders

5. Prepare a cash flow statement

After gathering all of this information, you can finally begin using it to assemble a cash flow statement. These statements are typically split into three sections, each of which contains certain income and expenses, as well as a subtotal for cash flow:

• Operating activities, which contains income and expenses related to your core business activities—in other words, those related to producing and delivering your product or service. 
• Investing activities, which should include income and expenses related to long-term investments—including the purchase or sale of stock, bonds, marketable securities, property, equipment, and IP. 
• Financing activities, which should contain income and expenses related to how your business finances its operations—for example, interest payments and principal repayments on business loans, dividend payments, and the issuance or repurchase of company stock. 

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Following these three sections, you’ll tally everything together and make a note of how your cash has changed during the reporting period—whether it has increased, decreased, or remained the same.

6. Look for insights

With your cash flow statement prepared, you can begin to look for insights in the information. As noted above, while an individual cash flow statement offers some insights into the health of your business, the most helpful analysis will typically come from comparing current results against past performance. 

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This will help you identify trends and opportunities for improvement. It will also make it easier to account for one-time expenses, such as a major purchase or real estate, and proceeds, such as those from a major asset sale.

What cash flow analysis can tell you

Cash flow analysis gives you a snapshot into key aspects of your company’s financial health, particularly its liquidity. 

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If your analysis results in a positive figure, then it generally means that you have enough cash on hand to operate the business and, ideally, reinvest for long-term growth and stability. If your analysis results in a negative figure, it may mean the opposite—and that you should take steps to right the ship before it goes on for too long. 

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That being said, it’s important to note that a negative cash flow isn’t always a bad thing. Early-stage startups, for example, often have negative cash flows as they scale and pursue growth initiatives, and that isn’t necessarily a sign that the business is struggling. And even mature businesses may experience a quarter or two of negative cash flow after having made significant investments. 

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Cash flow analysis can also help you to identify patterns in the way that your business makes and spends money—patterns that you can use to inform your business strategy. 

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If you notice that your business repeatedly sees a negative cash flow in the fourth quarter due to low seasonal demand, for example, you might find ways to reduce expenses in that quarter—reducing business travel, rescheduling recurring payments, or even embracing a new inventory strategy. Alternatively, you might decide to launch a new marketing campaign specifically or referral program with a goal of driving fourth-quarter sales. 

Getting cash flow analysis right requires accuracy

In order for your cash flow analysis to be effective, it’s got to be accurate. Otherwise, you risk painting an incomplete picture of how funds are moving through your business, which could cause you to draw the wrong conclusions during your analysis.

With this in mind, it’s incredibly important that you not overlook potential sources of income as you complete your analysis—particularly investing or financing income. Likewise, it’s critical that you fully account for all of your business’s expenses. 

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Ramp’s all-in-one expense management platform can help you identify your expenses much easier and with fewer mistakes than manually going through the books or receipts. Track everything from employee expenses and reimbursements to travel expenses to mileage, vendor spend, and more. Leverage AI-powered accounts payable to close the books in record time. Take advantage of real-time reports to make impactful decisions about company spend.