Learn How to Analyze Your Cash Flow and Better Manage Your Business

Cash flow is the lifeblood of a business and an essential element of many small business loan applications. Understanding, analyzing, and staying current on your business's cash flow is vital for survival. In fact, about 82% of business failures stem from poor cash flow management.

In this article, we’ll take you through how to calculate your cash flow and what it can reveal about the financial health of your business.

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How to analyze cash flow

To calculate your business’s cash flow, you need to know (1) your net income and (2) your expenses. Note that “income” doesn’t only mean revenue. Also factor in cash flow from investing and/or financing.

Expenses from your business operations might include:

  • Supplies and materials
  • Spending on fixed assets like machinery, furniture and technology
  • Payroll and bonuses
  • Your accounts payable
  • Rent and utilities

Simply put, understanding cash flow is figuring out what’s coming into the business, what’s flowing out, and what’s left at the end of the month. If cash flow is positive, you’re in good shape. Your next task is to ensure you maintain—and eventually increase—that number. If the number is negative, it’s time to pause and dig deeper. You might first want to identify the biggest sources of incoming and outgoing cash. Are you spending money unnecessarily? Could you negotiate better arrangements with your current landlord or vendors? How about sales—could they be better? Where’s the bottleneck?

Why is it important to analyze cash flow?

Analyzing your cash flow frequently gives you important insight into the financial stability of your business.  As your business grows, you may decide to apply for a small business loan, in which case the lender will look at your cash flow too. Strong, positive cash flow tells lenders that your business is well-managed, seeing stable growth, and will likely be able to pay the loan back. This makes you more likely to get your loan application approved.

When it comes to securing funding as a small business, SBA loans offer longer terms and lower interest rates. In order to qualify for an SBA loan, you need to demonstrate sufficient free (left over after expenses) cash flow. You also need to be current on any debt obligations. Finally, you’re going to need to provide tax returns from the three previous years and interim financial data.

If you’re applying for an SBA loan through SmartBiz, your cash flow (as both a business and an individual - the money you earn versus the money you spend) plays a role in several key calculations, especially debt coverage. This information helps lenders determine whether you have enough liquid cash to cover the money you are requesting.

7 cash flow management tips

So you now know what cash flow is, how to calculate it, why you should analyze it, and what kind of insight it can provide. Maybe you’ve even done your own analysis and found that there’s room for improvement. Here’s how to better manage your cash flow:

  • Negotiate with your suppliers. Can they offer better repayment terms?
  • Use a business credit card (responsibly). Cards are good for everyday expenses—especially if you get one that offers rewards—because they free up liquid cash.
  • Spread out your bill payments. If paying all of your bills at once is draining your cash supply, try spreading them out throughout the month.
  • Encourage customers  to pay you on time. Consider  offering a feature like one-click payment to make it easier for them.
  • Pay your employees via direct deposit. It’s faster and cheaper than writing checks.
  • Master your inventory management. Do you have stock that’s sitting around on the shelves? Not only is it not making you money, but it’s taking up valuable space (which you’re paying for).
  • Align the payroll cycle with your revenue. If revenue doesn’t come in as quickly, consider paying your employees once a month.

Take the temperature of your business with its cash flow

Cash flow tells you about the money entering and leaving your business. Positive cash flow means you’re making more than you spend, whereas negative cash flow means the opposite. This, along with your other financial statements (like your P&L sheet), can help you make smarter business decisions to ultimately improve your bottom line.

What is Cash Flow?

The term cash flow describes the net amount of funds coming in and being transferred out of a business. It demonstrates the business’s liquidity, meaning the extent to which it can cover expenses on short notice.

Positive cash flow indicates that a firm is successfully managing revenue and costs. When it comes to closing outstanding balances, reinvesting in the business, and handling financial emergencies, the company won’t run into any issues.

On the other hand, negative cash flow indicates that a business is incurring more costs than profits.

Why it Matters

Small business lenders typically evaluate cash flow in their application processes, especially for the lowest-rate financing. Strong cash flow can show lenders that potential borrowers are experiencing stable growth and can manage the additional responsibility of regular loan payments.

SBA Loans are known as the “gold standard” of small business financing because of their long terms and low rates. To qualify for an SBA loan through SmartBiz, you’ll need to demonstrate sufficient business and personal cash flow to service all debt payments, including the new SBA loan payment, backed by 3 years of tax returns and interim financial data.

Throughout the SmartBiz SBA loan application process, both business and personal cash flow are incorporated in several key calculations, specifically debt coverage. This metric helps banks assess whether you have enough cash flow available to cover additional debt. This short video has important information you need to know about cash flow calculation.

 What you need to know: The information provided through SmartBiz® University and the articles contained therein are for educational purposes only. Use of this information is not a replacement for personal, professional advice or assistance regarding your finances or credit history.