How To Do Cash Flow Analysis

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One of the fundamental tasks in running a business is accounting. If you are an entrepreneur who has just started your business, then it is imperative that you learn some accounting skills. This is especially true if you plan to do the bookkeeping of your new business yourself. Knowing how to conduct cash flow analysis is one of the accounting skills that any small businessman ought to have. Simply defined, cash flow is the money that comes in and out of the business. It is a measure of a business’s financial health. Obviously, it is better to have a business with a positive cash flow. 

For purposes of our discussion, let us measure the cash flow of a small business on a monthly basis. The first thing to is to determine the starting cash for the month. Simply put, starting cash is the amount you have on hand at the start of each month. Next, determine all sources of cash for the month, or what is referred to as Cash in. Sources of cash include sales, paid receivables, interest of cash from sales of assets or stocks. Make sure that all sources of cash are accounted for. Once you have determined all sources of cash, it is now time to identify items that you paid cash for. Cash out items, as they are often referred to, includes fixed and variable expenses. Fixed expenses include rent, payroll, and owner’s draw. Examples of variable expenses are supplies, utilities and taxes. 

Once you have all these information, you can now compute the ending cash. This is very easy to compute. Just add your starting balance and cash in, then subtract the cash out. The resulting figure is your ending balance. This will also serve as you starting balance for the next month. Obviously, a business with a positive ending cash is better than the business with the negative ending cash. A positive ending cash means that your business can still maintain operations in the coming month without needing additional cash infusion from the owner. In a best case scenario, a negative ending cash might mean that your small business just needs more capital. At worst, a negative ending cash might simply mean that your small business cannot maintain its operation. 

On the other hand, having a positive ending cash is not a true gauge of a business’ financial health. A positive change in cash flow is. This cash flow statement item is very easy to compute. Just subtract the starting cash from the ending cash. Your business is in good financial position if your ending cash is bigger than your starting cash. 

Now that you have completed a simple cash flow analysis for a small business, continue doing this on a monthly basis to make sure that your small business is in good financial health. Once you have mastered this, you can also try using the same steps to make a cash budget for the whole year. The only difference is that you will need to project all your cash in and out items. It would be a good way to exercise your accounting skills, and could turn out to be fun in the end.


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