Cash Flow Analysis: Definition, Benefits and How to Analyze? (2024)

A major part of your cash flow statement is your cash flow from operations. When calculating this, you need to consider your accounts payable.

Comprised of a number of vendors that you’ll have to pay within a short amount of time, the way you manage your accounts payable will greatly affect your cash flow.

For example, it may seem like you don’t have a lot of cash outflow right now, but you might have accounts payable that you need to settle at a later date.

You want to be making note of your accounts payable in great detail when conducting cash flow analysis. This way, you can be aware of how much money that goes into your business is actually reserved for your vendors as accounts payable.

If your accounts payable aren’t managed well, it’s very likely that your cash flow will end up in the negatives before you know it.



Similar to accounts payable, accounts receivable also make up a big part of your cash flow from operations.

In contrast to accounts payable, however, rather than the outflow of funds, you’ll be looking at the inflow when it comes to analyzing accounts receivable.

The deal with accounts receivable is that until your customers pay for the products that they’re buying, you won’t have hard cash on hand yet.

To have a holistic view of funds flowing into your business, you’ll want to take into account pending payments and unsettled invoices from customers. You can identify trends and pinpoint when you’ll be having a lot of cash inflow to use for expenses.



Oftentimes when people think of cash flow they think of the cash flow associated with operating activities. While they do make up a big part of the cash flow statement, the two other types of cash flow should not be ignored either.

However, some cash inflows and outflows from investments and financing have long-term effects that won’t be reflected in your cash flow statements just.

You’ll need to make note of them and separately review how they fit into your cash flow when analyzing cash flow statements.

Cash inflows from investments include the sale of businesses or assets that you have, but they won’t reflect how past investments are bringing you huge amounts of cash in sales.

Therefore, when you spend a lot of money on a particular investment, it may need context to justify the cash outflow in your cash flow statement.

Conversely, an item considered cash inflow from financing could be cash received from a loan. It’ll have to be noted that this loan will have to be repaid long-term.



If you have supplies and merchandise on hand ready to sell to your customers, they’d be categorized as your inventory.

While your inventory might not be directly reflected in your cash flow statement as they are excess supplies rather than active cash inflow and outflow, they’re important to note when analyzing cash flow statements.

Cash outflow from buying supplies recently might seem like a necessary thing to keep up with production for more cash inflow in the future, but this might not be true if you still have a lot of inventory.

Adding to it is not nearly as effective as using your cash for other expenses. You want to consider ways to use your inventory to positively impact your cash flow.



Credit, both on the giving and receiving end of it, has an impact on your cash flow even if it won’t be reflected on your cash flow statement until the credit has been settled.

If your business has been offered a credit line, for example, you’ll have to keep in mind that although it’s considered cash inflow right now, you will have to repay that credit, thus making it a future cash outflow.

On the other hand, extending credit terms to a customer will mean that there’s a delay in your cash inflow. You want to ensure that you have the right timing of customer payment due dates so that you don’t fall prey to cash flow problems.

When you analyze cash flow statement, keep in mind any credit given or received and how they would affect your cash flow.

Helps strategize, and manage the inflow and outflow of cash

Businesses aren’t stagnant. Having to realign your business priorities and strategies every once in a while is a common process for most businesses. Often, doing so will help you grow your business faster and better.

To help you figure out your priorities and strategize better, you should be regularly analyzing cash flow statements to see where your business is at.

For example, you’ll be able to pinpoint what payments are costly and taking a big toll on your cash flow. Similarly, you can also determine which stream of inflow is impacting your business the most.

Given that you’ll have a complete view of how your cash is present, you’ll also be equipped with the information you need to make well-informed decisions.

Come up with a game plan to strategically cut down your operating expenses or strategize on how to increase the effectiveness of your revenue streams.



If your business operates internationally or is looking to expand to more countries, it’s a good idea to regularly perform business cash flow analysis. You’ll be able to determine how the countries you already operate in are affecting your cash flow.

With a better understanding of the fiscal impact in those countries, you’ll find yourself not only developing better strategies for existing business entities but also coming up with a well-thought-out expansion plan.



Cash flow statement analysis doesn’t just give you a better understanding of your business internally.

Instead, it allows you to identify opportunities in new markets as well as markets you currently operate in. Both internal and external factors affecting your cash flow will become obvious after in-depth reviews and analyses.

When you match your business needs, priorities, and current position with market opportunities, it’ll be easier to determine the best course of action.

Whether that’s to expand into new markets that would support your business growth, strengthen your business in its current markets, or withdraw from certain markets that have a negative impact on your cash flow, doing a cash flow statement analysis will help you make sure that you’re moving in the right direction.



The last thing you want is to run into cash flow problems and issues in your business. But it’s difficult to be well-prepared for situations when you don’t have precedents. This is where analyzing cash flow statements can help you out.

By having a look at previous cash flow statements and examining them in greater detail, you’ll have a more solid idea of what your inflows and outflows look like at different points throughout your fiscal year.

If previous years’ cash flow statements show that you were often in a tight spot during a certain month of the year, you’ll be able to prepare yourself better for that same month in the coming years.

Looking for patterns in your business cash flow analysis enables you to stop issues and warning signs before they turn into unmanageable cash flow problems.

It should be noted that analyzing cash flow statements pull entirely from data on things that happened in the past. Your cash flow statements don’t reflect any growth that hasn’t happened yet, even if you have invested a fair bit of money.

If you invest in research and development activities for a new product, for example, all your cash flow statement will reflect is the outflow of cash from making that investment.

It doesn’t show the return that will be made on that investment, meaning that it’s not the most accurate and complete set of information on your business. It’s essential to keep this in mind when presenting to investors.

A cash flow statement analysis is important, but it’s also not the only financial statement that you should be reviewing.

For one, your cash flow statements are not great representations of your company’s profitability, nor should they be used to understand profitability.

Considering that your cash flow statement is representative of business cash, profits are deducted and losses are added back to get an accurate picture of your cash inflows and outflows.

In contrast, a profit and loss statement is drawn up precisely to understand your profitability. When that’s the goal in mind, consider doing a P&L statement analysis in tandem with cash flow statement analysis.



There are two types of accounting basis that a business can follow. Cash accounting considers and reflects your transactions based on when the money flows in and out of your business.

Accrual accounting, on the other hand, notes down transactions, income, and expenses as they happen, regardless of whether the money has changed hands or not.

Your cash flow statement follows the cash basis of accounting. It reflects money as it comes into your business and goes out of it. The accrual method is not considered when analyzing cash flow statements.

One thing of note is that accrual accounting is often said to give a better representation of your business performance, so cash flow statements analysis alone may not give you the most accurate representation of your finances.