The basis of any successful business begins with proper cash flow analysis. In a recent study, almost 60% of companies failed because of their inability to monitor and manage cash flow statements. If you're a stranger to a cash flow statement, then that's where you should begin. Even if you’re well-versed on the subject, there are cash flow analysis basics that can help you improve those skills.

Before you go out and purchase cash flow analysis software, it's important to understand the reasoning behind the process. Anyone can simply input numbers into a business cash flow software program, but then you won't know the meaning behind the output. The cash flow models can be of value if you know the reason they're integral and what they mean to your business. Therefore, before you implement any cash flow projections, there are a few items to consider, such as:

1. Know the essential elements and construction of a cash flow statement.

2. Use industry information sources to help understand cash flow statements.

3. Employ a tutorial or consultant to help you with cash flow analysis basics.

Action Steps
The best contacts and resources to help you get it done

Establish a cash flow analysis knowledge base

The areas from where cash flow originates are investing, financing and core operations. If you learn how to manage these inflows and outflows, the business will be much more effective. Cash flow analysis fundamentals help you create a solid foundation on which you can build. From this foundation, we can build upward until you know all aspects of cash flow analysis.

I recommend: Know the definition and derivation of cash flow analysis by examining the tutorial at Investopedia. Examine the preparation of a cash flow projection or statement available from the Edward Lowe Foundation (listed on eSmallOffice). Evaluate the regulations regarding cash flow statements at the Financial Accounting Standards Board.

Utilize industry sources for cash flow analysis knowledge

The best sources of information are from people and organizations that use it every day. This isn't any different with cash flow analysis. The industry organization members have personal experience with every aspect of cash flow analysis.

I recommend: Subscribe to The American Cash Flow Journal to know how to apply the basics to broader perspective. Take the self-study cash flow course from the American Institute of Certified Public Accountants.

Take advantage of cash flow analysis tutorials or professional tutors

Education on any subject doesn't happen in a vacuum. You can read all you want about cash flow analysis, but until you apply the knowledge, it'll only be static knowledge. Seeing how the cash flow information is applicable to real world situations is the best learning tool.

I recommend: Examine the cash tutorial at Bankrate to better understand the basics of cash flow analysis. Hire a cash flow consultant from Comerica Bank to help you learn cash flow model implementation.

Tips & Tactics

Helpful advice for making the most of this Guide

• •  If you ultimately decide to use cash flow software or templating, be certain to ask for a free trial period. Not all software platforms work in all company environments. You may find that the application is too complicated or produces insufficient output. With a free trial period, you eliminate the risk of this happening.

Cash flow is a measure of the amount of money your company makes and spends during a given period and is frequently used as a barometer of your company's health and worth.

Accurately calculating your company's cash flow is vital in determining if your company has enough money to operate. Understanding your cash flow lets you evaluate:

1. Borrowing needs
2. The timing of new hires and major purchases
3. The timing of payables
4. Product pricing and the amount of credit granted to suppliers
5. The need to make strategic cost-reduction decisions

Action Steps
The best contacts and resources to help you get it done

Use a cash-flow modeling spreadsheet template

Accuracy is critical with cash-flow forecasting. Thus, a tested spreadsheet template will contain formulas that will work. The best spreadsheet templates offer easy-to-understand graphics.

I recommend: Develop cash-flow projections using the Small Business Administration's downloadable Excel spreadsheet. Additional cash flow spreadsheets can be found at Michigan's Small Business and Technology Development Center. Study up on Excel's collaborative, charting and other advanced features.

Perform 'what if' analysis

Find break-even points for each of your product or service lines for each of your departments. Create three or more projections detailing best-case, worst-case and most likely scenarios based on the current economic situation and your company's growth goals.

I recommend: Use Microsoft's training resources to perform 'what if' analyses using Excel. QuickBooks users can contact professional advisors through the software vendor's Web site who are specially trained to customize the popular accounting software package.

Assemble financial records and employee forecasts

Set aside a multi-day period when the key people within your company can formulate their own departmental cash-flow projections, then add these forecasts to your own.

I recommend: Acquaint employees unfamiliar with cash-flow forecasting with this MasterCard International's free downloadable guide available at Startup Journal.

Maintain a record of cash flow forecasts to improve your accuracy over time

Create multi-year charts comparing cash-flow projections to actual year-end results.

I recommend: QuickBooks Premier Editions embeds forecasting functions within the popular accounting software suite, and shows you how your company's numbers compare to norms within 120 different industries. As your business grows, so will the complexity of its cash-flow projecting spreadsheets. Browse available software packages at Capterra's Business Performance Management Software Directory

Tips & Tactics

Helpful advice for making the most of this Guide

• •  Improve your cash flow by keeping cash in an interest-bearing account.
• •  Bill your clients regularly to keep cash flow coming in.
• •  Keep bankers and other creditors informed of your company's cash-flow projections.
• •  Assign values to forecasting spreadsheet inputs to help rank their importance. Will it be critical for your company to receive timely payments from key customers during the spring, for example? If so, focus your collection efforts when needed.

The cash flow analysis involves an in-depth examination of the inventory, credit, receivable and payable accounts. If you can determine the cash outflow or inflow to each of these budget items, it'll not only make your business more efficient, but also help sustain long-term profitability. A proper cash flow analysis can locate slow paying customers, overpaid suppliers or unfair credit terms.

In making the most of cash flow analysis, your company shouldn't treat this process as a onetime occurrence, but instead implement a system where you can constantly monitor business cash flow. One of the primary reasons businesses don't succeed is poor cash flow management. With the proper training and tools, understanding cash flow statements can become second nature in your company. However, before you implement and make the most of a cash flow analysis system, there are a few items to consider, such as:

1. Utilize cash flow analysis training to understand the process.

2. Employ a cash flow analysis template to make the job quicker.

3. Implement cash flow software to perform the analysis to make the job easier.

Action Steps
The best contacts and resources to help you get it done

Take cash flow projection and analysis courses

In order to master working a cash flow system, you'll need to understand how each part of the system works. It isn't enough just to know the basics of a cash flow statement; you should know how the statement relates to the business and how to improve cash flow.

I recommend: Examine the explanation from PowerHomeBiz.com on the importance and maximization of cash flow analysis. Enroll in the cash flow training course from ABTrainingCenter.com. Take the workshop on managing your cash flow system powered and produced by Virtual Advisor. Evaluate the seven ways to improve cash flow tutorial from the Microsoft Small Business Center.

Use cash flow templates to improve your analysis

To make a cash flow analysis much easier to implement, you can use a cash flow analysis template. These templates cut down on employee time and expense that come with trying to make your own template.

I recommend: Install the Microsoft cash flow template into your Excel spreadsheet application. Download the cash flow toolkit from the Business Owner’s Toolkit from the Toolkit Media Group.

Put a cash flow software package into action

The most effective way to maximize your cash flow analysis is to use a software application. However, you need to choose the application that best fits your business. For instance, if you choose an overly complicated platform and don't have the employees to operate it, then it won't be worth the time and effort.

I recommend: Download the free cash flow analysis calculator from Wheatworks Software. Try the cash flow software at 2020software.com. This comes with a free demo, so you see how it works and potentially decide if it’s the right program for you.

Tips & Tactics

Helpful advice for making the most of this Guide

• •  Cash flow analysis software is only as good as the functionality of the platform. Therefore, prior to purchasing software, ask the supplier for a free trial period. That way you can determine if it's worth the money. Business cash flow software always looks good in the demo, but the real test is having your employees use the software for an extended period.

You can use cash flow analysis to determine the value of a company, project or financial instrument. Unlike the balance sheet, a cash flow statement isn't subject to accounting subterfuge. In other words, a company cannot use accounting tricks to inflate its cash flow statement. That's why a cash flow analysis is such a useful business tool. Cash flow analysis can be determinative in deciding whether to purchase an investment, continue a project or figuring out the profitability of a business.

Below are cash flow analyses key terms that will help you understand the process:

Action Steps
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Cash flow statement

The cash flow statement is unlike other financial statements in that it doesn't include any credit accounts. This statement explains where the business money is coming from and where it's spent. The cash flow statement is the primary source of information in a cash flow analysis. The cash flow statement has three main sections: operating, investing and financing.

I recommend: Review the cash flow statement tutorial available at Investopedia. For detailed instructions regarding the cash flow statement, examine the courses at the Accounting Coach.

Free cash flow

Free cash flow is the amount of money a company has at the end of a quarter or fiscal year after paying all of its bills. In its simplest form, free cash flow is cash flow from operations minus capital expenditures. In a publicly traded company, a dividend payment to shareholders may be the best use of the free cash flow. However, some companies want to maintain a certain level of cash on hand at all times.

I recommend: For a definition of free cash flow, evaluate the information from Investor Words. Quick MBA is another resource for a detailed explanation of free cash flow.

Indirect and direct analysis

There are two types of cash flow analysis, indirect and direct. Indirect is the most common form and is usually simply called cash flow analysis. The direct method is less involved but not nearly as common.

I recommend: Use the indirect method primer at Financial Education to learn more. Review the direct method tutorial available at GoogoBits.

Cash flow from operations

The first section to review during a cash flow analysis is the cash flow from operations. Often called operating cash flow, this is all revenue minus any operating expenses.

I recommend: Assess the resources on analyzing cash flow from operations at Value Based Management.

Cash flow from investing activities

This section of the cash flow statement shows the amount of cash gained or lost from investment in financial vehicles and investments in plant and equipment.

I recommend: Examine the explanation of the cash flow from investing activities section from Conoco Phillips.

Cash flow from financing activities

Financing activities include the issuance or selling of stock, the paying of dividends and loans payments and modifications. Again, this section is for cash activities only.

I recommend: Study the cash flow from financing activities tutorial offered at Virtual Advisor Interactive.