Cash and cash equivalents, such as securities that a company generates or spends over a given period, are called cash flow. The runway of a firm is determined by cash on hand and cash burn rate: the more cash on hand and the lower the cash burn rate, the more room a company has to maneuver and, in most cases, the higher its valuation.
Profit is not the same as cash flow, and the money that flows in and out of your business is referred to as cash flow. On the other hand, profit is the money left over after all of your business expenses have been deducted from total revenue.
1. What Is Cash Flow Analysis?
Companies should track and analyze three types of cash flow to establish their liquidity and solvency: cash flow from operating activities, cash flow from investment activities, and cash flow from financing activities. A company’s cash flow statement includes all three.
Businesses do a cash flow analysis to see where money flows in and leaves out by correlating line items in those three cash flow categories. They can draw judgments about the firm’s current state based on this.
Bringing money in isn’t always a positive thing, depending on the type of financial flow. Also, spending money isn’t always a negative thing.
Main Points
- A cash flow analysis can help you figure out how much money a company made or spent over a given time.
- Understanding your income sources and where it goes is critical to running a financially viable company.
- A company could be profitable yet have negative cash flow, or it could be losing money but have positive cash flow.
- Complementary metrics like free cash flow and unhedged free cash flow provide unique insights into a business’s financial health.
2. What Is the Significance of Cash Flow Analysis?
A cash flow analysis determines the amount of money available to operate business activities and complete transactions. Current assets (cash or near-cash assets, such as notes receivable) minus current liabilities equals current assets minus current liabilities (liabilities due during the upcoming accounting period).
A cash flow analysis can help you figure out if your company can pay its debts and create enough cash to keep going eternally. Negative cash flow for an extended period might signal a probable bankruptcy, but positive cash flow is frequently a harbinger of good things to come.
3. Cash Flow Analysis in Five Easy Steps
There are a few key factors to keep an eye on for patterns and outliers that can reveal a lot about a company’s health.
- Aim for positive cash flow: When operating income exceeds net income, it’s a good sign of a company’s ability to stay viable and sustainably expand its operations.
- Positive cash flow should be viewed with caution: positive investing cash flow and negative operating cash flow, on the other hand, may indicate a problem. It could, for example, imply that a corporation is selling assets to cover operational costs, which isn’t necessarily a good idea.
- Analyze your negative cash flow: Negative cash flow isn’t always a bad thing for investment cash flow research. It could indicate that the company is investing in real estate and equipment to expand its product line. A positive operating cash flow and a negative investing cash flow could indicate that the business is making money and investing it is expanding.
Calculate your free cash flow: Free cash flow is the amount of money left over after paid operational and capital expenses. It can be used to pay down principal, interest, stock buybacks, or the acquisition of another business. - Operating cash flow margin establishes credibility: The operating cash flow margin ratio compares cash from operations to sales revenue over a specific period. Profitability, efficiency, and earnings quality are all demonstrated by a positive margin.
Cash flow analysis assists your finance team in better managing cash inflow and outflow, ensuring that adequate money is available to run—and grow—the company.
4. Using Software to Analyze Cash Flow
A free cash flow analysis’ math can be complicated, especially for large organizations or those with complicated finances. However, bookkeeping or accounting software, which is sometimes included as part of a broader ERP, can help you with heavy lifting. Your cash flow, free cash flow, and other metrics and the underlying facts are simply a few clicks away once your reports are set up in an ERP like Oracle NetSuite.
Large corporations employ teams of financial planning and analysis (FP&A) specialists who spend their days delving into the intricacies of financial data, searching for trends and changes to improve performance. Much of that process can be automated with the help of a strong ERP, allowing you to accomplish more with fewer resources.
As part of its NetSuite ERP system, Oracle NetSuite has introduced Cash 360.
Cash 360 is an automated solution incorporated within NetSuite that improves forecast accuracy and saves finance departments time by directly accessing NetSuite data. NetSuite users may use Cash 360 to benefit from a simplified and expedited cash flow forecasting process, giving them more confidence in their financial decisions.
Netsuite Cash 360 was created with two goals in mind. First, the module gives information about a company’s cash flow, and a dashboard shows accounts receivable, accounts payable, and available cash in real-time.
Second, the module calculates cash flow projections. Cash 360 calculates the future of a cash flow using as much financial data as possible. As a result, an organization’s liquidity may be calculated and anticipated.
With a real-time picture of their cash position and the ability to swiftly develop accurate near-term forecasts based on a wide range of data, such as financing sources, anticipated expenditures, sales forecasts, and billing schedules, the new solution helps customers better manage their cash flow. It also has a customizable dashboard that shows current cash balances, accounts payable and receivable balances, a six-month rolling cash flow forecast, and key reminders.
5. Conclusion
Smart investors would never acquire a company’s stock without first reviewing its financial statements, including cash flow. A more extensive cash flow analysis, available through ERP and advanced accounting software, provides information on a company’s financial health and future performance. Business owners, managers, and executives should review such data frequently to verify that their organizations are on course to accomplish their short- and long-term financial objectives.
Almost every organization relies on cash flow and cash flow analysis. Working without a grasp of financial flow is akin to flying blind. Never manage a firm without having up-to-date, accurate cash flow information.
