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As a business leader, it’s crucial to see how money moves in and out of your company—especially before making any sweeping decisions that will affect your organization.
After all, if you commit to a new project but find that you’re unable to fund it, you’ll run into a whole host of financial issues. And that’s not an uncommon problem: 82% of small businesses fail because they run out of money to fund their operations.
That’s why cash flow statements are an essential tool for any business owner or executive. Understanding your company’s cash flow is crucial to its sustained health and success.
But what exactly are cash flow statements? And how can you use them to determine a business’s profitability? Here, we’ll take a closer look at cash flow analysis—a practice conducted by finance professionals and business owners to do just that.
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A look at your company’s cash flow statement
In short, cash flow statements show how an organization makes money (cash inflows) and spends its funds (cash outflows) in a given quarter, year, or any other clearly defined period of time.
This statement is made up of three sections, each of which depicts a different aspect of a business's finances: it's operating, investing, and financing activities. Business leaders and investors alike use these three cash flow sections together to paint a comprehensive picture of a company’s financial standing.
Cash flow from operations
As its name suggests, cash flow from operations depicts the money going in and out of your company through normal business operations—things like selling products and services, payments made to employees and contractors, and the cost of utilities. As a result, you’ll also find accounts receivables, accounts payables, and income tax payables in this section.
By determining that your business has a positive cash flow, you prove that it’s able to sustain itself without taking on new debt in the process. You can then use any surplus funds from your operations to invest in new assets or initiatives to scale your business even further.
Cash flow from investing
Cash flow from investing, on the other hand, reveals how much money your company made or lost from long-term assets, such as vehicles, properties, large-scale equipment, and machinery that support your company’s operations.
In other words, cash flow from investing shows you how your company is investing in itself.
Cash flow from financing
Cash flow from financing features your company’s debt and equity transactions. Here, you’ll find dividend payments to shareholders, stock buybacks, bonds, and money borrowed from lenders.
This section is especially important for investors with a focus on dividends. Why? A healthy business uses cash from its (ideally) profitable business operations to fund them. Businesses that take on debt to pay dividends are a cause for concern among shareholders and are generally best avoided.
What is cash flow analysis?
Cash flow analysis is often used for financial reporting purposes, especially in the case of publicly traded companies.
As its name implies, cash flow analysis inspects a business’ cash flow statements—including the inflows and outflows of its operating, financing, and investing activities—to see where and how it spends and makes money over time.
Meanwhile, ratios like operating cash flow and free cash flow reveal further details about a company’s financial health. By looking at these numbers, business leaders and investors can discover how the finances of an organization affect its overall value, as well.
Operating cash flow, traditionally expressed as a percentage, indicates how much money an enterprise makes over a certain period of time. Essentially, it answers the question, “how many dollars in revenue does this business get for every dollar made through sales?”
If you want to determine a company’s profitability, you’ll want to look at its free cash flow instead. This number reveals how much cash is “free” to use for new projects or initiatives.
Cash flow analysis also offers additional benefits, depending on an individual’s company and their position at the business.
If you’re a business owner, for example, cash flow analysis helps you determine if your funds are running low. If they are, you will know to take steps to bring in more money by increasing your income, borrowing capital, or reducing your costs.
Investors, on the other hand, use cash flow analysis to determine whether or not a company is a sound investment. If, for instance, a company regularly brings in a profit but has been making less and less of it each year, that may spell impending disaster for potential shareholders. In this way, understanding cash flow statements helps you avoid adding high-risk companies to your portfolio.
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Cash flow analysis examples for three fictional businesses
Let’s say that Company ABC, a small car manufacturing plant in the Midwest, drew up a cash flow statement for last month’s inflows and outflows:
| Company ABC | |
| Operating activities | |
| Net income | $55,000 |
| Depreciation | 15,000 |
| Increase in accounts payable | 5,000 |
| Increase in accounts receivable | -55,000 |
| Increase in inventory | -35,000 |
| Net cash flow from operations | -$15,000 |
| Investing activities | |
| Equipment | -10,000 |
| Net cash flow from investing | -$10,000 |
| Financing activities | |
| Notes payable | 65,000 |
| Net cash flow from financing | 65,000 |
| Cash flow for the month | $40,000 |
Although a quick glance at their bottom line may seem to show that the company is doing well, a closer look at their cash flow statement reveals that this doesn’t hold true. It turns out that Company ABC suffered considerable losses in its cash flow from operating activities, with a total loss of $15,000.
So, why doesn’t that reflect in their bottom line?
If we look further down in cash flow for financing, we find that the organization raised $65,000—whether through loans or other means—that is keeping the company afloat.
As you can see, although the final number may appear sound, Company ABC is actually suffering financially. Their leadership team will need to find additional ways to boost their income or cut costs.
Let’s take a look at another example that compares the cash flow ratios of two companies, Company DEF and Company XYZ.
| Cash flow ratios in 2019 | Company DEF | Company XYZ |
| Operating cash flows | 60% | 23% |
| Free cash flow | $12,000 | $5,000 |
The positive numbers for operating cash flow show that both companies turned a profit in 2019. We can also see that Company DEF brought in more money last year, as it carries a higher percentage than Company XYZ.
Free cash flow indicates how much money a company makes after removing the funds reserved for its operations and capital expenditures. Here, Company DEF and Company XYZ have $12,000 and $5,000, respectively, that they can now reinvest into their businesses.
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Cash flow analysis allows you to “pull back the curtain” so you can assess the health and operations of any given company—just by taking a look at how the organization manages its inflows and outflows. This makes it a crucial tool for business leaders and investors alike.
However, putting cash flow statements and analyses together can be time-consuming for executives and the financial analysts tasked with preparing them. Although many finance professionals use Excel, the platform can be hard to work with—especially when different analysts in an organization use their own unique terminology (not to mention potentially incorrect data or calculations).
This is where Synario comes in.
An intelligent financial modeling software developed for Excel masters and novices alike, Synario eliminates the inefficiencies and inaccuracies that have plagued Excel users for decades.
When you replace your current platform with Synario, you gain the ability to draw up financial models and statements in mere seconds. The software comes with automated financial statements, making financial analysis a simpler and swifter task than ever before.
All you need to do is upload your historical data and input your logic. From there, Synario automatically creates complete, accurate financial statements using the information you’ve provided.
If you need to make a change to one part of your statement, for example, Synario immediately populates the rest of your sheets to reflect the new data. Meanwhile, our cloud-based technology updates any changes made across your entire system in real-time, so that team members in different parts of the world can work conjunctly on a project without issue.
Our patented Multiverse Modeling™ feature allows you to analyze different versions of your company’s financial statements, revealing what your business would look like under different conditions. These versions are all housed in one central hub, removing the version control issues that take place far too often when creating financial statements in Excel.
Although Excel may have been helpful thanks to its versatility and prevalence in the finance space, it’s time for this platform to pass the baton to a more intelligent option. Map out the future of your business like never before with the help of Synario.
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