Getting Insight From Your Cash Flow Statement

February 16, 2023

Managing cash flow is crucial for the success of your business.

The key to having stable cash flow lies in conducting cash flow analysis at least once a month – and more often if you’ve experienced cash flow problems in the past. To perform that analysis, you’ll need to take a detailed look at your cash flow statement.

What Is a Cash Flow Statement?

A cash flow statement is a financial report that breaks down the sources of a business’s revenue and how the company spent that cash. Think of it as a reflection of the inflow of revenue versus the outflow of expenses during a set period of time.

How Should You Analyze Your Cash Flow Statement?

“A good rule of thumb is to look at the relationship between your operating cash flow and net sales.”

Check for patterns every time you review a statement. A pattern of negative business cash flow over a few months can signal a need to start cutting costs or finding ways to build revenue. Consider cutting down on surplus inventory, raising prices, changing marketing tactics, or adjusting your staffing schedule to reset your cash flow.

A good rule of thumb is to look at the relationship between your operating cash flow and net sales. By examining this ratio, you can see how much cash from your sales is going into your company’s pocket rather than being used to pay your overhead costs.

If your cash flow is steadily increasing as your sales increase, the cash profit from sales is holding its own. If not, this is a sign that you need to find ways to control costs to increase your bottom line.

Why Do You Need a Cash Flow Statement?

Owners of small businesses often overlook the importance of tracking their cash balance or make mistakes while doing it. The truth is, although preparing or reviewing a cash flow statement is another task in your already busy schedule, it’s crucial for helping your company prepare for what’s to come – both the good and the bad. Here are four benefits of using a cash flow statement to track your company’s performance:

  1. It Allows You to Track Changes in Your Cash Balance
    By calculating cash income versus cash expenditures, you can identify patterns in how much and when money is coming in and going out. This allows you to plan for upcoming bills, pay periods, and unexpected emergencies with ease.
  1. It Paints a Clear Picture of Your Business’s Financial Health
    By getting a snapshot of your cash flow, you can see whether operations generate enough revenue for your business to sustain itself. It also lets you see your company’s true liquidity because the cash flow statement doesn’t factor in outside help from investors, loans, or lines of credit. This can give you better insight into your business’s true financial strength and sustainability.
  1. It Lets You Review Your Company’s Monthly Performance
    The more often you analyze your cash flow statements, the more obvious cash flow patterns will become. This allows you to better predict and prepare for shortages. Seasonal businesses and those with predictable downturns or slow periods should be especially conscious of their cash flow. Having an accurate picture of your finances makes planning for months of fluctuating revenue easier and helps make sure that you are covered for your year-round expenses.
  1. It Gives You a More Accurate, Cash-Only View
    Companies sometimes make the mistake of evaluating their finances based on all transactions – cash and credit-based – at the time they take place. This gives you an idea of your business’s performance, but it won’t give you a clear picture of your company’s financial health. It’s important to avoid overestimating your assets in hand.

A cash flow statement measures cash transactions only. This gives you an up-to-date view of your company’s liquidity and financial health, so you have a better idea of how your company is doing in meeting its short-term obligations. It’s an essential component of any financial plan. Just remember that it does not show whether the business will be profitable; it shows the cash position at a specific point in time, which can help you make more informed business decisions in the long run.

Better Banking. Better Decisions.

If you are struggling to understand or optimize your business’s cash flow, reach out to one of ENB’s Small Business Relationship Managers. We’ll be happy to get you on the right track.