What Is Cash Flow Analysis?

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What Is Cash Flow Analysis?

Increasing your cash flow is essential for your company, no matter the industry. However, to increase your cash flow, you need to devise a tested, effective cash flow analysis strategy. But what is cash flow analysis and how does it improve this vital aspect of any business?  

Cash flow analysis involves more than just monitoring your accounts payable and accounts receivable. It requires operational expense and spending efficiency evaluations, vendor relationship strategies, and restructuring your service contracts. 

When conducting cash flow analysis, you need to account for nitty gritty details about your cash inflows and outflow. Implementing the following tips will help improve your cash flow analysis abilities, and in turn, ensure your business’s sustained growth. 

At Fully Accountable, our full-service accounting team monitors your books, issues real-time reports, and forecasts potential cash flow issues. Whether you only need a financial controller or something more extensive, such as a fractional CFO, Fully Accountable is here to help with all of your cash flow goals. 

What Is Cash Flow?

Cash flow describes the net amount of cash and cash equivalents transferring to and from a business. Cash received or a business’s accounts receivable represents all for the money flowing into a business. Cash paid or accounts payable represents all of the money outflowings from a company to other parties. 

A company’s ability to sustainably grow and provide value to shareholders depends on generating a positive cash flow. More specifically, if a company wants a healthy cash flow, it must capitalize on its long-term free cash flow (FCF). FCF describes the money companies generate from their normal business operations after subtracting the money spent on capital expenditures (CapEx). 

What Is Cash Flow Analysis?

Cash flow analysis determines your company’s working capital, which is the amount of money needed to run business operations and complete all transactions. You can calculate your cash flow analysis by accounting for your current assets and liabilities. Analyzing your working capital provides a snapshot of your liquidity and prepares you for other financial endeavors. 

How Do I Perform Cash Flow Analysis?

Analyze Your Accounts Payable Process

Managing your accounts payable process is an essential component of your company’s cash flow. An outsourced accounting company can implement the right software into your company infrastructure, so you don’t have to worry about training. 

After you have the accounting software installed, you should communicate with your controller or in-house team which invoices are the most important to pay them first. Doing so gives you a more accurate picture of what you can expect from your accounts payable schedule. 

The final tip for improving your accounts payable process is establishing a meaningful relationship with your vendors so they extend payment terms as long as possible. Most businesses ask for a net 30. However, when you build positive relationships with vendors, they may be more flexible, sometimes offering up to 60 days for payment. The longer you have to pay, the more time you have to generate revenue. 

Finally, you should use a simple payment template to ensure the verifiability of your contracts. 

Analyze Your Accounts Receivable 

Encouraging customers to pay early and offering various payment options to your customers make it easier and more likely for your customers to pay their invoices on time. Even though payment processing options such as ACH and credit card payments come with processing fees, their benefits far outweigh the drawbacks. 

When it comes down to it, getting money in the door faster should be a primary directive for your accounts receivable mission. It eliminates time and labor spent on collection and prevents your business from piling credit card debt, helping you cover expenses.

Idle Cash Strategy 

To improve cash flow, put any money not earning any income to use. If you have large sums of money sitting in non-interest-bearing accounts, there are better places for them. You should consider moving the money into an interest-bearing account that earns anywhere from .5%-1% APY. You can also invest in new technology or prepay some expenses to improve your accounts payable. 

Who Has Access to Your Bank Accounts?

Maintaining effective cash flow requires effective asset protection. Asset protection requires safeguards such as secure IT infrastructure, limiting the number of people who have access to your accounts, frequently updating your passwords, and using a dedicated computer for banking purposes. 

Cybersecurity is one of the most important areas for emerging businesses to consider. Attackers continuously devise more elaborate plans to compromise your financial security. Advanced cybersecurity solutions are essential to protect your cash flow. 

What Business Functions Should You Outsource?

You don’t need in-house teams for every part of your business. IT management, accounting, payroll, and marketing are just a few examples of business areas to outsource. Fractionalized services are ideal resources. These services offer specialized expertise, making it easy for you to implement them into your company’s architecture without worrying about training or spending valuable resources. 

Outsourced CFOs and controllers can help take the accounting pressure off your shoulders. Outsourced solutions are often plug-and-play. In the case of fractionalized CFOs, you get access to real-time reports and financial forecasting that can help your business achieve sustainable growth. 

Are You Getting the Most Out of Your Service Contracts?

You should review all of your internet, phone, software, janitorial/building, and maintenance costs to see any ways to reduce the budget. With the increase of automated technologies,  you might be able to eliminate some cleaning services. 

For example, if you are using manual labor to clean industrial equipment you might be able to find automated solutions. Another example of re-evaluating your service contracts includes finding one of your current provider’s competitors that offers lower prices and use them as leverage for price negotiations. 

Is Your Weekly Cash Forecast Healthy?

Rolling cash forecasts improve overall cash flow by keeping you updated on projected inflows and outflows. You don’t have to incorporate complex technology to meet your cash flow projection needs. You can simply use an Excel spreadsheet. However, you should maintain customer receipts and outflows such as vendor payments and payroll data to ensure your weekly rolling cash forecast stays on point. 

Recording your rolling cash forecast helps you plan staffing needs, commit to new vendors, and ensure your funds’ availability to make payroll and vendor payments. You will also gain insight into your sales cycle by evaluating your weekly rolling cash forecast. 

What Are Your Operational Expenses?

Operational expenses can quickly bleed your cash flow dry. Whether you lease or buy, how often you check your inventory management, and how streamlined your processes can affect lost labor and cause you to spend more than you need to. Evaluating your operational expenses quarterly and trying to improve existing processes can prevent you from losing ample funds. 

Diagnose Your Spending Efficiency

Evaluating your spending efficiency requires you to examine which goods or services you need versus excessive expenses. Try asking yourself what you can cut from your monthly budget and pay close attention to trivial costs that add up in the long run. Buying lunches and installing a new TV in the office might seem like essential expenses to improve your team morale; however, it comes at the cost of an efficient cash flow, you need to re-evaluate your spending priorities. 

Examine Your Relationships With Vendors and Suppliers 

Product inventory and operational goods and services provided by vendors are essential components of your cash flow efficiency. If you don’t explore or question these relationships, you might eventually find that these relationships hinder your cash flow’s efficacy. Healthy, long-term relationships with vendors can lead to renegotiated prices and discounts for bulk orders, both adding to your cash flow’s health. 

Conclusion- What Is Cash Flow Analysis?

Conducting cash flow analysis isn’t a one-and-done fix. It involves extensive planning, and you can quickly overlook potential hangups regarding your cash flow structure. 

As a business owner or executive, you have a lot of conflicting responsibilities. Outsourcing portions of your company infrastructure such as accounting or payroll can free you to perform other pressing business duties. 

The most successful business owners are those who understand how to delegate effectively.  The fractionalized team at Fully Accountable simplifies the outsourcing process and integrates into your business model with little to no downtime. 

Contact us today to learn more about how we can perform cash flow analysis so you always stay up to date on your business’s financial health.  Our team of financial experts can implement effective software and data analysis techniques that make the cash flow analysis simple and effective. 

Heidi Cake

Heidi Cake

Author at Fully Accountable | 1-877-330-9401 | www.fullyaccountable.com

Heidi Cake is our Data Director. She studied at Indiana Wesleyan University with a degree in BS Strategic Communications and BS Leadership Studies and specializes in analyzing anything in her path and creating aesthetic appeal to visual documents. Heidi spent the first few years after college working in the non-profit sector on teams where she was handed anything that needed to be communicated creatively. She realized her most loved being able to communicate complex, abstract ideas which made her return to her love of numbers and data. Heidi brings an equally creative and analytical mind to the task of analyzing and communicating client data and statistics.