Cash Flow Analysis
The statement of cash flows is one of the four core financial statements for-profit businesses use. It shows how cash ‘flows’ in and out of a business during a specific period. Inflows show money coming into a business. Whereas outflows show money leaving a business. A business’ cash flows come from three different business activities: operating, investing, and financing. As a business owner, you more than likely are familiar with this financial statement. However, do you know how to utilize this statement to analyze your business? Cash flow analysis provides essential information about a business.
What is Cash Flow Analysis
A cash flow analysis is the analysis of the cash inflows and outflows of a business. It is important when performing a cash flow analysis to examine every part of the business that affects cash flow. Due to this, preparing a statement of cash flows is imperative. A business uses the financial statement to perform the analysis. The cash flow analysis reveals how a business generates money, where it comes from, and how it affects the value of the business. Ultimately, cash flow analysis provides a multi-faceted picture of a business’ financial health.
Why Cash Flow Analysis is Important
Reviewing a business’ profitability on its income statement is important. However, in many aspects, cash flow is the best evaluation of a company’s performance and financial health. Performing a cash flow analysis helps a business to assess its profits and liquidity. It provides business owners with an understanding of where their money is going. Analyzing cash flow regularly reveals things such as whether a business can afford the costs of its daily operations. Overall, a cash flow analysis can reveal many things about a business, such as:
- Business growth and retraction
- Stability of the business
- Source of where a business’ money is coming from.
How a Virtual CFO Can Help
A virtual CFO’s overall responsibility is to help ensure a business’ growth and financial health. This includes things like financial planning, tracking cash flow, and analyzing a business’ strengths and weaknesses. With their expertise and knowledge, a virtual CFO can not only perform a cash flow analysis but provide recommendations for improvements. For example, they can provide alerts to cash shortages and funding needs.
Cash flow analysis provides essential information and valuable insight into the financial health of a business. However, not everyone has the understanding necessary to perform this analysis. Our team specializes in cash flow analysis and is here to help!
Contributed by Elizabeth Partlow