How Important is a Cash Flow Analysis?

Conducting a cash flow analysis from time to time can be very helpful for businesses of all sizes and types. A healthy cash flow, which normally refers to the rate that cash is received for use in the operation of a company, is important to settling debts in a timely manner and helping a business build financial resources that can be called upon in the event that sales begin to slump. Periodically assessing the status of this cash flow provides data that makes it easier to determine just how financially healthy a company is, and what can be done to improve that vitality.

One of the main benefits of a cash flow analysis is that the company not only maintains a good understanding of where money is coming from, but how much. It is not unusual for this type of analysis to segregate business inflows of cash to determine what activities are generated decent returns. For example, the cash flow may be made up of payments remitted by customers, interest and dividend payments received from investments, and even returns on some type of financing venture. By classing each of these sources of cash separately, it is possible to determine if the investments are contributing an adequate amount to the cash flow or some changes are in order.

A cash flow analysis is not only concerned with where the money is coming from, but how often it shows up. Part of the analysis process is to look closely at what percentage of customers are remitting payments within 30 days, within 60 days, or within 90 days. The analysis will also reveal if some customers are routinely rolling over 90 days before remitting payments. This is valuable information that can be useful in developing new remittance strategies that encourage customers to pay their bills sooner rather than later, a move that places more cash in the hands of the company in a shorter period of time.

A cash flow analysis is not just focused on the money generated, but also what happens to the money once it is received. Often a company will seek to correlate the receipt of cash in some form with the due dates of current debt obligations. The idea is to make sure funds arrive in time to submit payments to vendors and suppliers before any late fees or charges are assessed. From this perspective, attempting to arrange payment dates to work in harmony with the normal flow of cash ultimately means more money left in the hands of the company to make improvements, purchase additional investments, or make capital improvements out of pocket rather than borrowing money to pay for those improvements.

Depending on the nature of the business, conducting a cash flow analysis as often as monthly is not unreasonable. This approach makes it much easier to head off a potential negative cash flow situation that could place the business in an awkward position, and to take steps that stabilize the company’s financial health during slow seasons. Many types of accounting software include reports that make the creation of a cash flow analysis relatively simple to manage, with some even providing tools that point out significant changes from a previous period.