How To Prepare a Cash Flow Analysis

Cash flow analysis is used to figure out the cash flow patterns in a business. It gives an entrepreneur an idea how money is earned and spent within a certain period. Cash flow analysis is usually done on a monthly basis and covers the cash flow patterns in a given month. By preparing a cash flow analysis, an entrepreneur can determine if the money he’s making is enough to sustain the operation of the business.

If you are a new entrepreneur, understand that the cash flow analysis is only one of the many accounting statements that you have to prepare. Here’s how it is done.

  • Prepare all the documents. You will need to have all the receipts, bills, log books, and other similar materials in making a cash flow analysis. Make sure to have them ready before you begin. If you don’t have everything you need, you won’t be able to arrive at the right income and expense projections.
  • Determine your income. Make an income projection for a certain month. This should include all the sales—cash and otherwise—and other forms of income from your business. When making an income projection, make sure to take into account the factors that will affect your income. These include the level of competition, the peak season, and the changes in the preferences of the customers.
  • Estimate your expenses. It will help if you categorize your expenses. Group together the operation expenses (equipment, supplies, employees’ salary and benefits, and rent), marketing and advertising expenses (fliers, ads, and website), financing expenses (loans and insurance policies), and tax expenses. List down the expenses under the categories. Then sum them up.
  • Determine the cash balance that you need to have. This can be any amount that is needed to successfully operate the business. It can change every month, but it is important to at least have a standard or minimum figure. This amount is what you should aim to have every month.
  • Deduct the estimated expenses from the projected income. This will determine if you are able to meet your target cash balance. If you have enough cash left after making a deduction, you can successfully operate your business and make a profit. If you are on the negative, this can be an indication that your business is not doing well.
  • Consider making a loan. If you don’t have enough cash to run the business for a particular month, you will have to borrow money from creditors, banks, or certain people. Make sure to include the loan in your next cash flow analysis. To settle the loan, you should have more inflows and fewer outflows the following months. If not, you will have to borrow more money, which will greatly affect your business.

Completing a cash flow analysis is a little confusing at first. So if you want, try to look for sample documents on the Internet. Take note how the income and expenses are broken down and tallied up. You can also try to consult a business expert.


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