Cash Flow Analysis for Small Business Owners

Why Every Business Owner Needs a Cash Flow Analysis

Pub owners reviewing paperwork
Hero Images / Getty Images


Cash flow is essentially the movement of money into and out of your business; it's the cycle of cash inflows and cash outflows that determine your business's solvency. Poor management of cash flow is the cause of 82% of business failures, according to a study performed by Jessie Hagen of U.S. Bank, so proper monitoring of cash flow is critical.

Cash flow analysis is the study of the cycle of your business's cash inflows and outflows, with the purpose of maintaining an adequate cash flow for your business, and to provide the basis for cash flow management.

How is Cash Flow Analysis Performed?

Cash flow analysis involves examining the components of your business that affect cash flow, such as accounts receivable, inventory, accounts payable, and credit terms. By performing a cash flow analysis on these separate components, you'll be able to more easily identify cash flow problems and find ways to improve your cash flow.

A quick and easy way to perform a cash flow analysis is to compare the total unpaid purchases to the total sales due at the end of each month. If the total unpaid purchases are greater than the total sales due, you'll need to spend more cash than you receive in the next month, indicating a potential cash flow problem.

You can also do a detailed cash budget for your business.

Examples of the Importance of Cash Flow Analysis

Cash flow analysis is particularly important for startup businesses or businesses undergoing rapid expansion where increasing capital expenditures, higher labor costs, purchases of new equipment, and increased inventory require large cash outflows, while at the same time sales are in a grow phase and cash inflows tend to lag (see 8 Sources of Business Start Up Money and How to Get a Small Business Loan).

Keeping track of cash flow is also important for seasonal businesses such as retailers who do most of their business at holiday times or weather-dependent businesses such as landscaping or construction.

Solving Cash Flow Problems

Sometimes cash flow issues are simply a result of poor bookkeeping practices.

Many self-employed contractors are too busy with their day-to-day business activities to keep their books up to date and tend to fall behind on paying bills and invoicing and/or collecting payment from customers. An obvious remedy for most businesses is to use accounting software (which can generate invoices, pay bills, and generate cash flow statements and accounts receivable reports). Another solution is to hire a bookkeeper.

If the cash flow problem is temporary many small businesses use lines of credit or temporary loans.

Example Cash Flow Statements

Simple yearly, quarterly, and monthly cash flow statements/budgets can demonstrate existing or potential cash flow problems. As demonstrated in the following cash flow statements for a fictitious landscaping business, seasonal drop off in revenue can result in negative cash flow:

ABC Landscaping - Cash Flow by Year
Cash Inflow    
  Landscaping Services$40,000$42,000$41,000$43,000
  Gardening Services$20,000$21,000$23,500$23,000
  Window Cleaning Services$15,000$17,500$18,000$18,000
Total Cash Inflow$75,000$80,500$82,500$84,000
Cash Expenditures    
  Capital Costs (Equipment purchases)$5,000$1000$300$500
  Maintenance and Repair$2,400$2,000$2,900$2,000
Total Cash Expenditures$46,400$43,900$45,100$45,500
Net Cash Flow$28,600$36,600$37,400$38,500


ABC Landscaping - Cash Flow by Quarter - 2015
Cash Inflow    
  Landscaping Services$1,000$19,000$22,000$7,000
  Gardening Services$500$8,000$8,500$1,500
  Window Cleaning Services$0$8,500$11,000$1,000
Total Cash Inflow$1,500$35,500$41,500$9,500
Cash Expenditures    
  Capital Costs (Equipment purchases)$0$1,000$300$500
  Maintenance and Repair$1,000$500$200$500
Total Cash Expenditures$2,000$18,600$18,500$5,000
Net Cash Flow-$500$16,900$23,000$4,500



Also Known As: Cash flow forecasting, cash flow projection.

Examples: Doing a cash flow analysis of your accounts receivable will show you which customers are slow payers.