7 Cash Flow Analysis Techniques and Tips

cash flow analysis

Every business company must prepare two financial reports such as an income statement and a cash flow statement as a monthly accounting cycle of the company. The income statement in the income statement will show the company's profit or net income. Meanwhile, the cash flow statement will show the position of the company's cash.

What is Cash Flow?

Now we will talk about cash flow. The company's cash flow at a point in time is the difference in cash between cash at the beginning of the period and the end of the period. The proceeds from loans, income, and asset sales go into cash, as well as the cash out for direct costs, operating costs, principal debt services, and purchase of assets such as equipment. Cash is king in small businesses.
However, cash also determines whether your business will skyrocket, or even get worse. The following are several sections of the cash flow statement from various aspects. Analyzing the company's cash flow will help you with financial reports in your business.

How to Analyze Cash Flow

Analyzing cash flow is tantamount to following a method to check the health of your business finances. Correct cash flow analysis will make cash last and sufficient for operation from month to month.
The first thing you have to do is create a cash budget, such as a short-term financial forecast plan. Determine the amount of cash flowing in the company during the month. If it's a new business, then enter the initial balance in cash that you want to have for 1 month.
After that, maybe you will spend money to buy goods or other monthly expenses. Usually, you will incur a quarterly fee such as taxes. You must schedule all expenses regularly.
Third, make sure the cash inflow each month must be greater than the cash outflow so that the money is sufficient for company operating costs. Have someone with experience calculate your company cash payments.
The company's ending balance for the first month will be the opening balance in the second month. Perform the same analysis every month. As your business grows, you may add more items to your cash flow analysis. Just decide on the minimum cash ending balance to keep the life of the company in order.
If cash flow is negative in a month, look for investors or loans to people closest to you and it could also be the bank. Once the cash flow is positive and stable, pay back the loan. Do this analysis every month according to your estimates.

Difference between a budget and a cash flow statement

Creating a cash flow statement is important for the continuity of your small business. However, many still confuse the difference between a budget and a cash flow statement. What's the difference?
The cash budget will help businesses in managing the company's network capital which is usually budgeted monthly or quarterly. Think of it as short-term finance because it's easier and faster to set up.
The cash budget document will tell the company how much cash it has available at the end of the month. Meanwhile, the cash budget will show an increase in networking capital which can be used to reduce operating costs or pay off borrowed money.
The cash flow statement is a report that is prepared together with the balance sheet and income statement. That is why the cash flow statement is more formal because it is presented from the credit and debit items in the cash budget.

Comparative Balance Sheet for Businesses

As discussed earlier, financial reporting requires information from a balance sheet that comes from the last two years and compares the two for a cash flow statement. For this reason, a comparative balance sheet analysis is conducted to develop a cash flow statement. First, consider the increase or decrease in asset and liability accounts in two balance sheet years. Not only that, but cash flow from operating activities must also be considered because it can be a negative number, or vice versa can be positive.
Cash flows from investing activities include any long-term investment or investment in fixed assets. This cash flow must be considered every year.
Cash flows from financing activities are cash flows that are financed from long-term bank loans. Funding payments from banks and investors will be reflected in this cash flow.
After getting each cash flow, then you can combine the three parts into net cash flow for the company.

How to Prepare a Cash Flow Statement Using the Indirect Method

In preparing a cash flow statement, there are 2 methods. The first is the direct method, and the rest is the indirect method that some business enterprises generally prefer because of its simplicity. The difference between these two methods lies in the operational activities. If the direct method incorporates cash receipts from operations as well as cash disbursements, the indirect method starts with net income and an income statement which will then be adjusted as depreciation.
The data you need to prepare a cash flow statement is a comparative balance. There are some income statement data from balance sheet data for two years which will eventually be made into a cash flow statement. First, prepare cash flow from operations and get the net income. Consider the increase or decrease in asset and liability accounts within two years of balance sheet information. Furthermore, net cash flow from operating activities will be included in the summary of the first part of the cash flow statement.
Cash flows from investing activities will include any long-term investments from the company plus investments in fixed assets. Prepare the net cash flow from investing activities to become the second part of the cash flow statement.
Cash flows from financing activities must also be prepared in detail where the cash flows out and into borrowers such as banks or investors. Prepare the net cash flow from financing activities.
Net cash flow comes from the three parts of the cash flow statement to achieve a cash flow perspective. This will result in a net increase in the company's cash flow within a year.

Free Cash Flow Calculation

The final point is one of the most important when analyzing cash flow as a small business owner. Free cash flow is cash that a company generates and leaves after paying for the expenses of the resulting capital (plant or other equipment).
Free cash flow is included in the cash flow analysis section. This is quite important considering the many company scams that have sprung up. Investors are now looking at the concept of free cash flow to assess or avoid manipulating earnings per share or net income.

Free Cash Flow Source

To calculate free cash flow, come from:
sales income - operating expenses and taxes - investment in operating capital.
Meanwhile, free cash flow comes from net operating profit after tax - net investment in operating capital
Free cash flow comes from net cash flows from operations - capital expenditures.

Calculate the Company's Cash Flow Ratio

Financial ratios in which operating cash flow, price or cash flow, and cash flow margins will help business owners focus on cash flow.
By calculating the cash flow ratio, you will get information about the liquidity, solvency, and viability of your company.

0 Response to "7 Cash Flow Analysis Techniques and Tips"

Post a Comment

Iklan Atas Artikel

Iklan Tengah Artikel 1

Iklan Tengah Artikel 2

Iklan Bawah Artikel