Saturday, June 10, 2017

The Accountant’s Guide to Performing a Stellar Cash Flow Analysis

Your business is doing really well; you’ve worked hard, invested your time, money, sweat, and tears! Finally, an opportunity to land that big sale or create a strategic partnership that will move your business to the next level has arrived and you know that it will change everything.

But what if your company isn’t able to seize this opportunity due to poor cash flow?

Unfortunately, this situation is all too common and can be a crushing blow to a business. The ability to accurately and effectively manage your cash flow is vital to the ongoing success of your business and even more important to its potential growth. Most businesses work with an accountant to learn ways to be more efficient, boost profitability, and save money on taxes. But your accountant can also help you analyze your cash flow to make sure you have enough capital to maintain and grow your business.

How Do Accountants Evaluate Cash Flow?

Accountants use a combination of reports and analytics to evaluate the cash flow of a business. Two reports that are commonly used are the Statement of Cash Flows and the Cash Flow Projection. The Statement of Cash Flows tells you how cash was generated and used during a prior period, while a Cash Flow Projection is used to project what the cash balance is expected to be on a certain date.

The Statement of Cash Flows categorizes transactions into three types of activities; operating activities, investing activities, and financing activities. The sum of all transactions in a category reflects the amount of cash provided by or used by the activity.

You can tell a lot about the financial stability and priorities of management by examining the Statement of Cash Flows. For example, a company that shows cash used by operating activities and cash provided by financing activities could indicate that the company is not producing enough cash to sustain operations and has borrowed money to stay afloat. While this could be a sign that the company is in trouble, it could also indicate that the company is in a growth stage, perhaps cash has also been used for investing in equipment or other property.

A Cash Flow Projection starts with the current cash balance and adds expected inflows and outflows for a period to arrive at an expected ending cash balance. This is useful in determining when a company might need to consider financing to cover cash lean periods or predict a good time to make a large purchase.

Liquidity ratios are important to evaluating cash flow as well. Working capital measures a company’s ability to meet current obligations by subtracting all currently due liabilities from their total current assets. A positive working capital indicates that, in the event of a crisis, a business can pay off all its short-term debts. A negative working capital indicates that a company is illiquid.

Two other ratios commonly used are the current ratio and quick ratio. Both ratios give an idea of the company’s ability to meet its current obligations by dividing current assets by current liabilities, but the quick ratio excludes inventory from the calculation because its purpose is to only measure a company’s most liquid assets. There are other ratios that may be used for specific industries or business types as well.

Accountants use a combination of reports and ratios in order to get a complete analysis of a company’s cash situation. Using these reports or ratios individually, without the others, can give a distorted view of the full picture.

Where to Start

Before you consider doing a cash flow analysis, it’s important to make sure that your accounting records are accurate and up to date. Make sure that your bank and credit card accounts are reconciled to the statements prepared by your bank before you begin, and that your accounting records reflect any outstanding loans or other obligations. Working with a good bookkeeper or accountant can help you ensure that your accounting is complete.

Use an accounting program such as QuickBooks, which includes built-in tools and reports to help you analyze your cash flow. You can also check out other apps such as Float or Pulse, which provide easy to use, dynamic cash flow budgets, tools, and analytics.


Analyzing your cash flow is an important part of maintaining your business’ financial health and should become a regular part of your business management activities. Recognizing when a cash shortage is coming will give you the time to adequately plan and secure the funds you need to sustain and grow your business. Find an accountant who can help you set up a plan to monitor and manage your cash flow so that you have the right information to help you make sound financial decisions.

The post The Accountant’s Guide to Performing a Stellar Cash Flow Analysis appeared first on Fundera Ledger.

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