A cash flow is the net amount of cash that is moving in and out of a business. The cash flow analysis is an evaluation of the cycle of cash inflows and cash outflows during a specific period to determine the stability of the business.
The cash flow analysis involves examining the factors that affect the cash flow of the business, such as
Analyzing the cash flow will determine and identify cash flow problems and provide a solution to improve the cash flow.
As stated above, the cash flow analysis is performed by evaluating those factors that affect the cash flow of the business analysis. One of the fastest and easiest ways to perform the cash flow analysis is to compare the total unpaid purchase from the total of sales made at the end of the month.
If the total unpaid purchase is greater than the total sales due, then your business needs to spend more cash than in the next month, larger than what you will receive. This situation indicates that there is a potential problem in your cash flow.
The cash flow analysis is not only performed to determine the stability of the business, it is also important for small and startup businesses, and businesses that are undergoing a rapid expansion where the increase of capital expenditure, higher labour costs, purchase of new equipment, and increased inventory requires a large cash flow.
Keeping track of the cash flow analysis is also important for seasonal business such as those businesses who operate most of their transactions during holidays, or businesses that are solely dependent on the weather, such as landscaping and construction.