Cash Flow Analysis

What Is Cash Flow Analysis?

Cash flow analysis is a step-by-step process for determining how much cash and cash equivalents a company generates and spends over time. It consists of a historical analysis of past cash flow patterns, a projected cash flow forecasting future cash positions, and a variance analysis comparing actual vs. projected cash flows. 

This data is used to prepare a cash flow statement (CFS), typically on a monthly, quarterly, or annual basis. This document summarizes how money moves in and out of a company, whether there is enough to cover expenses, and what is left over after the bills are paid. 

The cash flow number at the bottom of the CFS represents the amount of cash readily available to operate and grow the business. The more cash on hand available and the lower the burn rate, the higher the business's valuation.  
 

Cash Flow Analysis Methods 

Business planning professionals use two standard methods to compile and calculate the operating activities section of a CFS. 

• The CFS direct method lists all actual cash inflows from operating activities and subtracts all cash disbursements to reach a net income. 
• The CFS indirect method uses net income as a starting point and adds or deducts from that amount for non-cash expenses, like depreciation and stock-based compensation, and changes in working capital. 

Components of Cash Flow Analysis

A company’s CFS contains three main sections: 

Cash flow from operations refers to all cash inflow from ongoing operations, along with cash outflow for business activities in a given time period.  

Cash flow from investing reflects the amounts generated from or spent on capital expenditures and sales of fixed assets like property and equipment, businesses, securities, and other long-term investments. Specific items in this category may include business acquisitions, the purchase of investment securities, and expenses for maintaining physical assets. 

The third category is cash flow from financing. This section reports all cash flow related to debt and equity financing, including loan repayments, recently borrowed funds, and company stock issuance and/or buyback.  
The final sum of cash flows from operations, investing, and financing can be positive or negative, depending on whether the company earned more than it spent during the statement period.

Understanding Cash Flow Analysis and Its Role in Your Business

There are several reasons why cash flow analysis matters for companies of all sizes.

• Improved Decision Making. By looking at the big picture, businesses can strategically time large expenditures.   
• Better Budgeting. Cash flow analysis helps businesses predict future financial needs and align spending with cash availability.  
• Early Warning System. The process helps identify potential cash crunches and patterns of deficits so companies can adjust their modeling accordingly.  
• Investment Planning. A CFS is vital to investment planning, helping to determine the funds available for growth over defined periods of time. 
• Financing Decisions. Cash flow analysis helps assess the need for loans against the need for investors to either generate cash or delay purchases for sustainable operations. 

Cash flow statement analysis is not used only for internal decision-making. Investors and analysts look at a company’s cash flow to assess its value and determine whether it may be a worthwhile investment. This is just one of EP Wealth’s comprehensive business planning services. Find an advisor near you to learn how we can help position your company for long-term growth.