5 Top Tips for analysing your cash flow statement

Understanding your cash flow is essential for the success of any business. One of the best ways to understand your cash flow is to analyse your cash flow statement. A cash flow statement shows how money flows in and out of your business over a specific period. Here are five ways to analyse your cash flow statement to understand your cash flow:

• Look at your net cash flow:

The first thing to look at when analysing your cash flow statement is your net cash flow. Your net cash flow is the difference between your inflows and outflows. If your inflows are greater than your outflows, you have a positive net cash flow, which is a good sign. If your outflows are greater than your inflows, you have a negative net cash flow, which is a warning sign.

Analysing your net cash flow can help you to determine if your business is generating enough cash to cover your expenses. It can also help you to identify any areas where you can reduce costs and increase revenue.

• Examine your operating activities:

The next thing to examine is your operating activities. Operating activities are the day-to-day activities that generate revenue for your business. This includes sales, expenses, and working capital.

Analysing your operating activities can help you to identify the source of your cash inflows and outflows. For example, if your sales are increasing, your cash inflows should also be increasing. If your expenses are increasing, your cash outflows should also be increasing.
By examining your operating activities, you can identify areas where you can improve your cash flow. For example, you can reduce your expenses or increase your sales.

• Look at your investing activities:

Investing activities are the activities that involve the purchase and sale of long-term assets, such as property, plant, and equipment. These activities can have a significant impact on your cash flow.

Analysing your investing activities can help you to determine if you’re investing in the right areas. For example, if you’re investing in assets that aren’t generating a return, you may need to adjust your strategy.

• Analyse your financing activities:

Financing activities are the activities that involve the financing of your business, such as borrowing money or issuing stock. These activities can also have a significant impact on your cash flow.

Analysing your financing activities can help you to determine if you’re financing your business in the most cost-effective way. For example, if you’re paying high interest rates on your loans, you may need to refinance.

• Use ratios to analyse your cash flow:

Ratios can be a powerful tool for analysing your cash flow. There are several ratios that you can use to analyse your cash flow, including the operating cash flow ratio, the free cash flow ratio, and the cash conversion cycle.

The operating cash flow ratio measures your operating cash flow relative to your sales. The higher the ratio, the better your cash flow. The free cash flow ratio measures your free cash flow relative to your sales. The higher the ratio, the better your cash flow.

The cash conversion cycle measures the time it takes for you to convert your investments in inventory into cash. The shorter the cycle, the better your cash flow.

Analysing your cash flow statement is essential for understanding your cash flow. By examining your net cash flow, operating activities, investing activities, financing activities, and using ratios, you can identify areas where you can improve your cash flow and ensure the success of your business.

Who is ActionCOACH’s Business Coach Mark Dilks?

Mark Dilks is an accomplished business leader, experienced coach, mentor and business builder. He supports business owners, executives and teams across Milton Keynes, Bedford, Northampton, Luton & Dunstable in all aspects of building profitable high growth businesses; from start-up phase all the way through to maturity and divestment. No matter what challenges you are facing, Mark will invariably have encountered a similar situation previously and will be able to support you to quickly and efficiently overcome your business hurdles by sharing examples of how other business have solved similar problems that you are experiencing. He is motivated, driven, tenacious and is able to get the very best out of all the resources available to his clients and to ensure that the maximum results possible are achieved.