Imagine a business, if you would, that shows decent margins, low debt, and slowly growing sales. Bankers examine the financial statements declare that the company is in good shape. “Carry on and keep up the good work,” they say.

But the company is suffering, getting later and later with supplier payments and struggling to make the payroll.


cash flow analysis

In my consultancy practise, I have found than an emphasis solely on financial statements is misplaced. In the majority of enterprises, financial statements are forensic in nature, arriving well after the damage is done and looking entirely in the rear view mirror.

A cash flow analysis using a cash flow template is an indispensable tool to operate a business profitably. It can easily be done on paper, a white board on in a spreadsheet programme.

The principle of cash flow analysis is simple to understand. How much is in the bank today begins the calculation. Add to that balance, the amount of cash inflow from cash payments and accounts paid. Subtract what must be paid to suppliers, rent and employees, et.al.. The net result is the ending amount in the bank. That ending balance becomes the starting balance for the next cycle.

What is important is that we now know when expenses can be paid without bouncing a cheque. We can estimate the cash coming in this week. We know what must be paid. We know when a bill can be paid. If this week is cash poor, we can delay a payment. Or better, we can do something to accelerate a receivable coming in or make that sale that to make that difference.

The result is that cash flow analysis can help us to predict and control the company’s future. Try that with a profit and loss statement!

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