How to Perform a Cash Flow Analysis (Template + Examples)

1 June, 2023
Brett Johnson, AVP, Global Enablement

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19 min

Table of Content

Key Takeaways
What is Cash Flow Analysis?
Why is Cash Flow Analysis Important?
Components of Cash Flow Analysis
Steps to Perform Cash Flow Analysis
How to Perform a Cash Flow Statement Analysis
Cash Flow Analysis Example
Impact of Cash Flow Analysis on Business Success
Cash Flow Analysis Software that Grows with Your Business
Cash Flow Analysis FAQs

Key Takeaways

  • Explore cash flow analysis basics, components, and key indicators for financial insights.
  • Uncover a step-by-step guide to performing cash flow analysis and methods to assess key items in cash flow statements.
  • Gain insights into financial wellness and strengths through real-life cases and comparative analysis.


In the dynamic realm of business, the key to survival and growth lies in mastering the art of financial management. Amidst the myriad of financial metrics and strategies, one stands tall in its ability to unlock a company’s true potential: cash flow analysis.

It’s like the beating heart of an organization, providing the lifeblood needed to sustain operations, fuel growth, and weather economic storms.

Read on to explore the profound importance of cash flow analysis – what it entails, its components, steps to prepare an analysis, and real-life examples, empowering your business for financial success.

What is Cash Flow Analysis?

Cash flow analysis examines and evaluates the inflows and outflows of cash within a company over a specific period. It provides a comprehensive view of how cash moves through a business, highlighting the sources and uses of cash and offering valuable insights into its liquidity.

Let’s explore this concept through Sarah’s story, a savvy retail store owner facing perplexing financial challenges:

Sarah’s retail store witnessed a surge in sales, hinting at success. Yet, beneath the surface, she grappled with expense management and financial stability. To tackle this dilemma, Sarah embraced meticulous cash flow analysis, uncovering a hidden truth:

  • Although her revenue appeared promising, delayed payments and mounting expenses created a cash crunch.
  • Empowered with these insights, Sarah took decisive action, implementing strategies to optimize her cash flow.
  • She gained a deeper understanding of the timing of cash inflows and outflows, enabling her to anticipate and plan for potential cash shortages or surpluses.

This newfound knowledge-empowered Sarah to take control of working capital management, meeting her financial obligations with precision.

Why is Cash Flow Analysis Important?

Cash flow analysis holds immense significance for businesses, and here’s why:

Informed Decision-Making

Enables insightful decisions on investments, expenses, and growth opportunities.

Long-Term Planning

Anticipates cash requirements and ensures adequate liquidity for obligations and operations.

Operational Optimization

Identifies areas for improvement in cash management, expense reduction, and supplier relationships.

Working Capital Management

Assesses the availability of funds for daily operations and financial obligations.

Financial Viability

Determines the ability to pay bills, cover expenses, and mitigate potential bankruptcy or financial distress.

Components of Cash Flow Analysis

To gain a comprehensive understanding of a company’s financial landscape, cash flow analysis comprises three essential components:


  • Cash Flow from Operations:

    1. Focuses on the cash generated or used in the company’s day-to-day operations.
    2. Includes revenue, expenses, changes in working capital, and non-cash items like depreciation and amortization.
    3. Reveals the cash flow directly associated with the core business operations.
  • Cash Flow from Investing:

    1. Examines the cash flow resulting from purchasing or selling long-term assets, such as property, equipment, or investments.
    2. Provides insights into how investment decisions impact the company’s cash position.
    3. Assesses the effectiveness of capital allocation and the potential returns generated from investments.
  • Cash Flow from Financing:

    1. Analyzes the cash flows resulting from activities related to financing.
    2. Includes issuing or repurchasing shares, obtaining or repaying loans, and paying dividends.
    3. Assesses the impact of financing decisions on the company’s cash flow and capital structure.

What Goes In a Cash Flow Statement

Component of Cash Flow

Expected Inflow

Expected Outflow

Cash Flow from Operations

Sales revenue

Interest received

Dividends received

Operating expenses

Interest paid

Income taxes paid

Cash Flow from Investing

Sale of long-term assets

Purchase of long-term assets

Cash Flow from Financing

Issuing of shares


Dividend payments

Loan repayments

By dissecting these components, cash flow analysis unveils the intricate interplay between a company’s operational, investing, and financing activities.

Steps to Perform Cash Flow Analysis

To begin the cash flow analysis process, it is essential to have a cash flow statement, which provides a detailed account of the cash inflows and outflows within a specific period.

The cash flow statement is crucial as it captures the actual cash movement, helping identify the sources and uses of cash and providing a foundation for the analysis. Typically, the finance team leverages accounting software or readily available free templates to generate these statements.

The overall net cash flow is obtained by summing up the net cash flows from operations, investing, and financing. It represents the company’s cash position change during a specific period.


How to Perform a Cash Flow Statement Analysis

When conducting a cash flow statement analysis, there are several major items to look out for that can provide insights into the health of a business:

Operating Cash Flow Trends:

  • Analyzing the operating cash flow trend over time can indicate the business’s ability to generate consistent cash from its core operations.
  • Positive operating cash flow demonstrates that the business generates more cash than spending, while negative cash flow may suggest financial challenges.
  • Here’s a general formula to determine operating cash flow: 

Cash Flow from Operations = Net Income + Non-cash Expenses – Changes in Working Capital

Calculating Cash Flow from Operations

When determining cash flow from operations, two commonly used methods are:

  1. Direct method 
  2. Indirect method

While both methods can be employed, the indirect method is more widely adopted in business and finance. Let’s delve into how to compute cash flow from operations using the indirect method:

Begin with Net Income:
Start with the net income figure from the income statement, which represents the company’s profit after accounting for expenses and taxes.

Add Back Non-Cash Expenses:
Include non-cash expenses, such as depreciation and amortization, by adding them back to net income. These expenses are deducted for accounting purposes but do not involve an actual cash outflow.

Adjust for Losses and Gains:
Account for any losses or gains from the sale of assets. Add back losses or deduct gains to accurately reflect the impact on cash flow.

Consider Changes in Non-Current Assets:
Consider changes in non-current assets, such as investments or property, which may affect cash flow.

Factor in Changes in Current Assets and Liabilities:
Analyze changes in current assets (excluding dividend payable) and current liabilities (excluding notes payable) to determine their impact on cash flow.

Free Cash Flow:

  • Assessing the trend of free cash flow, which is the cash available after meeting operating expenses and capital expenditures, is crucial.
  • Positive free cash flow indicates the company has sufficient funds to invest in growth opportunities or return value to shareholders.

Working Capital Management:

  • Monitoring changes in working capital, such as accounts receivable, inventory, and accounts payable, provides insights into the efficiency of cash conversion cycles.
  • Increasing receivables or inventory levels without a corresponding rise in payables can indicate potential liquidity issues.

Cash Flow Adequacy:

  • Evaluating whether the cash flow is adequate to cover debt payments, dividends, and planned investments helps assess the company’s financial stability.
  • Insufficient cash flow to meet obligations may lead to negative cash flow and the need for external financing.

Cash Flow Ratios:

  • Calculating key cash flow ratios, such as the operating cash flow ratio or cash flow margin, can provide a comparative analysis against industry benchmarks.
  • Deviations from industry norms may indicate strengths or weaknesses in managing cash flow.

By following these steps and focusing on these key items, businesses can gain valuable insights into their financial health, make informed decisions, and take action to optimize cash flow, ensure financial stability, and drive sustainable growth.


Cash Flow Analysis Example

Here’s a snapshot of a cash flow analysis between two hypothetical firms – Monsters Inc. and Gusteau’s- showcasing identical net income of $500,000. Furthermore, their year-end cash stands at $600,000, with an equal alteration in cash ($550,000) over the year.


Key Insights from the Cash Flow Analysis:

  • Monsters Inc. exhibits:
    • A negative operational cash flow of -$50,000, indicating less cash generated from its primary operations.
    • Dependent on a singular asset sale gain ($600,000) to bolster their overall cash position.
  • Gusteau’s, in contrast, exhibits:
    • A robust operational cash flow of $600,000 indicates a healthy cash generation from its core business activities.
    • Strategic use of cash for property acquisition ($27,500) and debt repayment ($30,000), indicates growth-oriented and financially judicious decisions.

The analysis underlines that Monsters Inc. may face cash flow pressures due to low operational income and reliance on non-recurring items for cash generation. Conversely, Gusteau’s demonstrates a robust cash flow position, reflecting financial stability and efficient operational performance.

This comparative study underscores the importance of cash flow analysis in comprehending a company’s financial wellness and pinpointing areas of concern or strength.

Impact of Cash Flow Analysis on Business Success

Cash flow analysis stands as a cornerstone of financial management for businesses of all sizes, serving as a real-world litmus test for the financial health of any business.

Liquidity Evaluation:

Consider a retail business gearing up for the holiday season. A cash flow analysis ensures they have sufficient cash on hand to stock up on inventory and meet the anticipated surge in demand for tomorrow.

How to Create a Cash Flow Projection (Template + Examples)

Profitability versus Cash Flow:

Picture a tech start-up that has secured substantial sales contracts, but payment terms are net-90 days. The start-up may be profitable on paper, but a cash flow analysis reveals if they have sufficient immediate cash to cover operational expenses.

Investment Attraction:

When a food chain is seeking expansion funding, investors would evaluate its cash flow. Positive, consistent cash flow signals financial stability and growth potential, enhancing investor confidence.

However, conducting cash flow analysis manually can be arduous and error-prone due to the high volume of transactions coupled with expanding customer portfolios. The task of value-added analysis often plays second fiddle to the process of data administration and preparation. This is where cash flow analysis software becomes essential.

Cash Flow Analysis Software that Grows with Your Business

Employing a cash management software solution, particularly one that integrates into your existing tech stack and other accounting systems, can significantly optimize cash flow analysis. This transition is transformative, especially for businesses managing large volumes or complex financial structures. Here’s why:

  • Simplify Complex Calculations:With software like HighRadius’s Cash Management, intricate computations involved in free cash flow analysis are automated, eliminating data collection and administrative complexities.
  • Seamless Reporting:Once set up, your intuitive dashboards and reporting features are readily accessible, presenting the underlying details in a centralized workspace.
  • Automated Forecasting:AI-driven software can predict future cash flow trends, providing real-time strategic, actionable insights for business planning.
  • Efficient Workforce Utilization:Robust cash management software automates significant parts of the financial analysis process, freeing your finance teams to focus on pattern detection and improving results rather than crunching numbers.

Understanding your cash flow and position through regular check-ins is vital, whether a small business or a large enterprise. A powerful cash management system turns a tedious, time-consuming process into a streamlined operation, driving better business results through advanced financial analysis.


Cash Flow Analysis FAQs

What is the purpose of cash flow analysis?

Cash flow analysis provides businesses with a complete view of their financial landscape. Examining cash inflows, outflows, and liquidity needs enables a deeper understanding of micro-financial trends, empowering businesses to make informed decisions and optimize their financial strategies.

What is the formula for cash flow?

The formula for calculating cash flow is Cash Flow = Cash Inflows – Cash Outflows.

Is cash flow the same as profit?

No, cash flow and profit are not the same. While profit represents the excess of revenue over expenses, cash flow reflects the actual cash movement in and out of business.

What is considered strong cash flow?

Strong cash flow refers to consistent positive cash flows, indicating that a business generates enough cash to cover expenses, invest in growth, and meet financial obligations. It signifies financial stability and supports business operations and expansion.

What type of cash flow is most important?

All components of cash flow (operations, investing, and financing) are important. However, cash flow from operations is often considered the most critical, reflecting the company’s core business performance.

What is global cash flow analysis?

Global cash flow analysis assesses a business’s financial position by considering income sources, expenses, and activities across entities and jurisdictions. It provides a comprehensive view of the overall financial health.


Related Resources

Cash Management
Treasury & Risk
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