Managing cash flow is crucial for the success of your business. A strong and stable cash flow is essential to sustainable growth.
The key to having stable cash flow lies in conducting cash flow analysis at least once every quarter 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.
Why Do You Need a Cash Flow Statement?
A cash flow statement is valuable in helping to determine the short-term viability of your company, showing how much actual money your business has generated and its ability to pay bills. Once you have the numbers included in your cash flow statement, you will be able to analyze your cash flow and use this analysis to make better spending and sales decisions.
How Should You Analyze Your Cash Flow Statement?
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 find 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.
The information contained herein is for general informational purposes only and does not constitute tax, legal, or business advice.
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