Cash Flow Analysis

Brief Description

Cash flow analysis is the process of examining, interpreting, and forecasting the cash inflows (money coming in) and cash outflows (money going out) within a business over a specific period. It helps businesses understand where their cash comes from, what it’s used for, how much is left over, as well as projecting future cash inflows and outflows for effective cash management and planning.

Several metrics and ratios are used in cash flow analysis to assess a company’s financial health, including operating cash flow, working capital, days sales outstanding (DSO), days payable outstanding (DPO), current ratio, and cash flow coverage ratio.

Benefit

(i) Assess financial health: Understand a company’s ability to generate cash to meet its obligations and invest in growth.

(ii) Determine working capital: Determine the amount of money available to operate the business and manage daily expenses.

(iii) Inform decision-making: Guide decisions regarding budgeting, pricing strategies, investment opportunities, financing needs, and expansion plans.

(iv) Detect financial issues: Identify potential problems early on, such as insufficient cash flow, allowing for proactive intervention.

Authorities For Further Research

Cash Flow Analysis is not a regulated service, however, it does have two primary methods:

(i) Direct Method: Calculates cash flows by summarizing actual cash receipts and payments.

(ii) Indirect Method: Adjusts net income for non-cash items and changes in working capital to arrive at operating cash flow.