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What You Need To Know About Cash Flow Analysis

At a Glance

Main Takeaway

Analyzing cash flows is a fundamental aspect of financial management that enables businesses to understand their financial health, solvency, and liquidity. By examining the inflow and outflow of cash within a company, cash flow analysis provides valuable insights into its operations’ effectiveness, ability to meet short and long-term obligations, and overall financial performance.

This analysis plays a crucial role in decision-making, such as evaluating investment opportunities, assessing financing options, and managing day-to-day cash flow requirements.

Next Step

Understand the importance of cash flow analysis, the metrics used to measure cash flows, and how they can help you evaluate your company’s financial health and performance.


What is a Cash Flow Statement?

A cash flow statement (CFS) is one of the key financial statements (along with the income statement and balance sheet) that reports the amount of cash and cash equivalents, like T-bills, entering and leaving a company. It is used by businesses to evaluate the company’s financial health. It helps investors, creditors, and others understand how a company generates its cash, where that cash is spent during a specific period and the balance of cash at the end of that period.


Sections of Cash Flow Statements

A typical cash flow statement can be divided into three sections, each based on different cash sources:


Operating Activities

Cash flows directly related to a company’s primary business operations are part of the operating activities section. It includes cash received from customers, paid to suppliers and employees, and other operating expenses. This section assesses the cash-generating ability of the company’s core activities.


Investing Activities

The investing activities section reports cash flows associated with long-term asset investments. This section includes purchases and sales of property, plants, and equipment (PP&E), securities, and other businesses. Cash flows related to loans made to other entities also fall under this category.


Financing Activities

Cash flows from activities related to the company’s capital structure are included in the financing activities section. This section includes cash received from issuing or borrowing funds (such as issuing stocks or obtaining loans) and cash paid for dividends, debt repayments, or share repurchases. Financing activities reflect the company’s efforts to raise capital and manage its financial obligations.


At the end of each section, the cash flows are summed up to calculate the net cash flow for the period. The net cash flow represents the overall increase or decrease in the company’s cash and cash equivalents during that time.


What is a Cash Flow Analysis for Businesses?

Cash flow analysis for businesses is a critical financial management tool that examines cash movements in and out of a company. It tracks and evaluates cash inflows and outflows to gain insights into a business’s financial health, liquidity, solvency, and cash management practices.

Compared to a cash flow statement, which breaks down the sources of cash inflows and outflows, a cash flow analysis determines whether the overall cash flow generated is net positive or negative. This information can help investors and business managers assess the cash available to run business operations, identify potential cash flow issues, and implement remediation strategies.

Cash flow forecasting can be a part of a business’s cash flow analysis. Forecasting measures historical inflows, outflows, and timings to make projections on the amount of cash the company will have at any point in the future. Forecasting can also consider future business activities and operations, making it useful for scenario analysis by helping managers simulate cash flows with different outcomes.

Cash flow analysis is often conducted using dedicated financial reporting software such as Jirav. Windes Client Accounting Services has experts with extensive knowledge and experience using Jirav, simplifying your company’s financial planning and analysis (FP&A) to help you make optimal financial decisions.


Indicators for Measuring a Company’s Investment Quality

Basic cash flow analysis can be as simple as comparing inflows and outflows in the cash flow statement. However, they may not be sufficiently detailed to understand the health and investment quality of a company’s cash flows.

Managers looking for more detailed information can use one of three methods to measure the company’s investment quality: free cash flow, levered free cash flow, and operating cash flow.


Free Cash Flow

The Free Cash Flow (FCF) metric is a representation of the cash generated by a company’s operations after accounting for operational and capital expenditures. These expenditures generally include any spending necessary to keep the business running or expanding, such as equipment, machinery, infrastructure, software, research & development (R&D), marketing, training, acquisitions, and mergers.

FCF is calculated by subtracting all capital and operational expenditures from the operating cash flow. The result shows the amount of money available to the company for other purposes, such as investment, growth opportunities, paying dividends, offsetting debt, or repurchasing shares.

A high FCF indicates the company has surplus cash even after operating expenses. Maintaining a high FCF is a sign of strong financial health.

A low or negative FCF indicates the company is experiencing financial issues. However, they are not necessarily indicative of poor financial health. There are three primary causes for low and negative FCF:

  1. Post-growth or post-expansion: Companies experiencing growth phases typically spend most of their surplus cash to make new acquisitions or start new projects, temporarily leading to short-term negative cash flow as an investment for future growth and profit.
  1. Seasonal periods: Companies in specific industries naturally experience periods with low sales and periods with high sales, resulting in low or negative FCF during the low periods. Industries commonly experiencing seasonal cash flow periods include hospitality, tourism, retail, agriculture, and construction.
  1. Financial inefficiencies: Companies experiencing consistent operating losses or inefficient capital management may be affected by negative FCF. In these cases, remediation strategies may be necessary to ensure continued business operations.


Levered Free Cash Flow

The Levered Free Cash Flow (LFCF) metric is a modified Free Cash Flow (FCF). In addition to accounting for operational and capital expenditures, this metric includes interest expenses and debt repayment. LFCF considers the cash available to all capital providers, such as equity and debt holders.

This method is beneficial for a business looking to measure the impact of debt and interest on its overall expenses. It offers a broader perspective than FCF for measuring the company’s financial health.

The primary benefits of the LFCF method are:

  1. Analyzes a company’s debt servicing capacity: Using LFCF to measure a company’s investment quality lets investors and managers determine whether it can cover all of its debt obligations, making it a valuable indicator of its financial health in relation to debt.
  1. Assessing overall financial risk: The LFCF metric can be used as a risk assessment tool. LFCF considers the impact of debt on the company’s ability to generate cash, providing insights into its risk profile from an investor’s perspective.
  1. Evaluates debt sustainability: LFCF lets a company evaluate the sustainability of its debt levels over long periods. It helps measure whether the company can generate enough cash to support its debt repayments, predict a timeframe for full repayment, and evaluate whether the debt burden is manageable and sustainable.


Operating Cash Flow

The Operating Cash Flow (OCF) metric measures the company’s cash generated or spent by its core operations. OCF focuses on day-to-day business activities and expenses and does not include financing or investing activities.

OCF is calculated with a simple formula: add net income, non-cash expenses, and any changes in working capital. Net income is total revenue minus all expenses, non-cash expenses are any expenses unrelated to cash outflows (e.g., depreciation or amortization), and working capital changes are any changes related to the company’s assets and liabilities.

Using OCF to measure a company’s investment quality benefits investors and managers who want to measure its financial health from a day-to-day perspective. It provides three primary benefits:

  1. Assessing cash flows directly: OCF measures a company’s core operating cash flows, providing unique insights into its cash flow dynamics and day-to-day business activities. It helps investors and managers evaluate the company’s ability to generate positive cash flows and meet short-term expenses such as salaries or suppliers.
  1. Evaluates earning quality: Evaluating a company’s financial health through OCF helps determine whether it can convert sales and revenues into cash. The more sales and revenues convert into cash receipts, the higher the company’s earning quality and the more sustainable its revenue sources.
  1. A tool for cash flow planning: OCF is a valuable metric for planning and managing the company’s cash flows. Companies can use the data to create cash flow forecasts and projections, helping them make more informed decisions on financing, investments, and capital management.


Benefits of Cash Flow Analysis

The primary purpose of cash flow analysis is to help the company understand how much cash it generates over a specific period. Cash flow analysis offers numerous benefits to businesses, empowering them with valuable insights into their financial operations. Understanding the company’s cash flows is crucial for making accurate and informed business decisions.


Allows for Easy, Objective Measurements and Comparisons

Cash flow analysis provides a straightforward and standardized method for measuring and comparing cash inflows and outflows over different periods. It offers a clear numerical representation of the cash movement, allowing for easy tracking and assessment of financial performance.


An Accurate Representation of Your Business’s Financial Health

Other financial statements include non-cash and accounting adjustments, whereas a cash flow statement only includes the business’s cash positions. This reflects the availability of cash for immediate use and is a realistic representation of your business’s financial health.


Provides Insights into Financial Trends

Analyzing a company’s cash flow provides companies with many data points to evaluate its financial trends and growth potential. For instance, an analysis can build a retrospective of the company’s historical cash flow patterns, helping managers determine trends and historical performance. Investors and managers can use trends and past performance to model cash flow projections accurately.


Helps Identify Cash Flow Problems for Actionable Solutions

Business cash flow analysis also serves as an early warning system. The analysis can catch problems before they escalate by identifying areas where cash outflow is greater than cash inflow. By recognizing these issues, your business can problem solve to alleviate the issue.


How Windes FP&A Can Help With Your Cash Flow Analysis

Windes Financial Planning and Analysis (FP&A) can provide valuable support for your cash flow analysis through its expertise in various tools and software, such as Jirav. By choosing Windes, your business will receive help with cash flow analysis in four ways: budgeting, forecasting, reporting, and scenario analysis:



Windes FP&A can help you develop comprehensive budgets that align with your strategic goals. We can help you identify revenue streams, cost drivers, and investment needs, giving you the tools to prioritize them. Accurate and meticulous budgeting lets a business set targets for cash inflows and outflows, facilitating more effective cash flow management.



Windes FP&A also excels at financial forecasting, using historical data, industry trends, and market insights to project future cash flows. Using advanced models and software, Windes can generate accurate cash flow forecasts allowing businesses to plan for the future more efficiently.


Cash Flow Reporting

Customized cash flow reports provide insight into your company’s use of cash. These reports summarize cash inflows, outflows, and net cash flow, providing an accurate representation of a company’s current cash positions.


Scenario Analysis

Windes can conduct scenario analysis, providing data and insights to companies to evaluate the potential impact of future events or business decisions.


Scenario analysis can model different scenarios, such as market fluctuations or price changes. Businesses can use the data and insights to assess how these changes impact their cash flow and identify opportunities and potential risks. They can also use scenario analysis to plan for contingencies, stress-test the company’s financial performance in extreme or adverse situations, and inform investors and stakeholders of its theoretical financial capabilities.


Enhance Your Business’s Financial Planning with Windes

Build detailed financial reports and enhance your company’s financial planning with Windes. Our team of financial reporting professionals can use financial reporting software like Jirav to conduct thorough cash flow analysis and help you evaluate your organization’s financial health.

Contact our team today to learn more about Windes, Jirav, and how our outsourced accounting services can help grow your company.


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