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How to Improve Cash on Hand with a Cash-Flow Analysis

Posted by Dan DeBoest on Tuesday, January 21, 2020

See why cash flow is important for your business and how to conduct a cash-flow analysis.

Image of a business analysis on an ipad

Cash flow is one of the most important measurements for a business — arguably even more important than profits. Cash flow is the net amount of cash and cash-equivalents flowing into and out of a business. It accounts for everything a business pays out, like payroll, suppliers, loan payments and utilities, as well as for everything that comes in from sales, accounts receivable and loan advancements. 

There are situations where a business could be profitable, but still not have enough cash flow to make all of those payments. For example, a mom-and-pop hardware store that allows a customer to start a tab and pay for their purchases at a later date may record that as a sale right away, showing profit, but will not receive payment on the bill until later. The hardware store owner has already paid their supplier for the products, so this practice will have a negative impact on cash flow, despite the positive impact on the store’s profits.

Another example is if a business sells a product to a customer, which may be another business, but gives them a term of 90 days to pay the invoice. The sale will help the company’s profitability, but they will need cash flow from previous sales or other sources to pay for operational expenses until the invoice is paid.

Conversely, there are situations where a business is not profitable, but has enough cash flow to stay afloat and make all of their payments. For example, some larger businesses are able to take on additional debt and bring in more cash, despite weak or negative profits.

Common Problems That Reduce Cash Flow

There are several factors that could be leading to a negative cash flow for a business. In some cases, it could be a restaurant with servers who are not recording sales, or a greenhouse that has a lot of spoilage and suffers a loss from unsold flowers after Valentine’s Day. Whatever the case, a business will need to increase their profit margin if their cash flow is not adequate.

When a business first starts, their margins may be thinner as they get out into the community and build their client base. As the company matures, they start spending money on additional employees to answer phones, upgrading technology or even moving into a larger office space, all of which do not generate revenue. A business needs to increase their margins to ensure they have enough cash flow to pay for these things.

Using a Cash-Flow Statement to Improve Cash Flow

A cash-flow statement presents a business owner with all of their cash inflows, minus their outflows to tell them how much cash on hand they have to operate their business. There are three main components of a cash-flow statement.

  1. Operating activities: This includes all aspects of day-to-day operations, including your inflows from sales and receivables, as well as your outflows for payments to suppliers, utilities, etc.
  2. Investing activities: This includes any investments you make in the company. This could be money you spent purchasing a new copier, or money that you brought in by selling the old one. Another example is purchasing a new office building and selling the old one.
  3. Financing activities: This shows any financing that brought cash into the business. This could include a line of credit that was opened to bridge the gap while waiting for a customer to pay on an invoice. This could also include a loan for purchasing a new office building. This would show an inflow for the loan amount, and then an outflow for the purchase.

It’s recommended that business owners do a cash-flow analysis at the same time each month to avoid any inconsistencies between inflows and outflows. If you see that you have less cash on hand than you thought you would, you can see where your money is going and decide if you need to cut costs or adjust your pricing to increase your margin.

Collection of accounts receivable is another big factor in cash flow. If you’re granting your customers a 90-day payment term, you could consider scaling that back to a 10-day payment term or leveeing a fee if they wait longer than 10 days to pay on their invoice.

Getting Started with a Cash-Flow Analysis

If you’re doing your own accounting work, most accounting software products, like QuickBooks, will allow you to load all of your financial data and will generate a cash-flow statement for you. Any bookkeeping or accounting firm can also provide cash-flow statements for you as a part of the services they offer.

The business owner, all senior level managers, the manager of accounting and finance, the sales manager and any other managers that control cash items should be involved in a cash-flow statement analysis to discuss prices, payment terms, upcoming sales, etc. to make sure your cash flow is adequate.

Commercial bankers at Northwest Bank take pride in reviewing cash-flow statements with business owners. We can provide insight on where your money is going and help you make decisions to improve your cash flow so your business can thrive.

Contact a commercial banker today to learn more.

The Author

Dan DeBoest

Dan DeBoest

Regional Bank President

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