Cash flow analysis is the process of examining how money moves in and out of a business during a specific period of time. It helps to evaluate a company’s liquidity, flexibility, and overall financial performance. Cash flow analysis can also reveal the sources and uses of cash for different activities, such as operations, investing, and financing.
Cash flow analysis is based on the cash flow statement, which is one of the main financial statements of a company, along with the balance sheet and income statement. The cash flow statement shows the changes in the company’s cash and cash equivalents (CCE) over time. CCE are the most liquid assets of a company, such as cash, bank deposits, and marketable securities.
The cash flow statement is divided into three sections: cash flow from operations, cash flow from investing, and cash flow from financing. Each section shows the net cash inflow or outflow from the respective activity.
- Cash flow from operations reflects the cash generated or used by the normal business operations of a company. It includes cash receipts from sales, cash payments for expenses, interest, and taxes, and adjustments for non-cash items such as depreciation, amortization, and changes in working capital. Cash flow from operations indicates how well a company can generate cash from its core business activities.
- Cash flow from investing reflects the cash spent or received by the company for investing activities, such as buying or selling property, plant, and equipment (PP&E), acquiring or disposing of other businesses, or making or collecting loans. Cash flow from investing indicates how much a company is investing in its future growth or expansion.
- Cash flow from financing reflects the cash raised or paid by the company for financing activities, such as issuing or repaying debt, issuing or repurchasing equity, or paying dividends. Cash flow from financing indicates how a company is funding its operations and growth.
The net increase or decrease in CCE is the sum of the cash flows from these three sections. It represents the overall change in the company’s cash position over the period. A positive net cash flow means that the company’s CCE has increased, while a negative net cash flow means that the company’s CCE has decreased.
Cash flow analysis can help investors, creditors, and managers to assess a company’s financial health and performance. By comparing the cash flows from different periods, activities, and companies, they can identify the strengths and weaknesses of a company’s cash management, profitability, solvency, and growth potential. Cash flow analysis can also help to forecast future cash flows and plan for cash needs.
Basic Theory
Cash flow analysis involves tracking the movement of cash within an entity. There are three main categories to
consider:
- Operating Activities: Cash transactions related to the core business operations, including
revenue and expenses. - Investing Activities: Cash transactions related to investments in assets such as property,
equipment, or securities. - Financing Activities: Cash transactions related to raising capital or repaying debts.
Procedures for Cash Flow Analysis in Excel
Step 1: Data Gathering
Collect data on cash inflows and outflows. This may include sales, expenses, loan payments, investments, and other
relevant transactions.
Step 2: Create Excel Table
Organize the data into a structured Excel table. Use columns for date, description, category (operating,
investing, financing), and amount.
Step 3: Separate Cash Inflows and Outflows
Create separate columns for cash inflows and outflows. Positive values represent inflows, while negative values
represent outflows.
Step 4: Categorize Transactions
Categorize each transaction into operating, investing, or financing activities. This classification helps in
understanding the sources and uses of cash.
Step 5: Summarize Cash Flows
Create summary rows to calculate the total cash inflows and outflows for each category and overall.
Scenario: XYZ Company Cash Flow Analysis
Let’s consider XYZ Company’s cash flow for the year 2023. Below is a simplified table of their cash
transactions:
| Date | Description | Category | Amount ($) |
|---|---|---|---|
| 2023-01-01 | Sales Revenue | Operating | 300,000 |
| 2023-02-15 | Equipment Purchase | Investing | -50,000 |
| 2023-04-10 | Loan Received | Financing | 100,000 |
| 2023-06-30 | Operating Expenses | Operating | -150,000 |
| 2023-09-20 | Dividend Payment | Financing | -30,000 |
| 2023-12-31 | Sale of Securities | Investing | 20,000 |
Calculation
- Operating Activities:
- Total Inflows: $300,000
- Total Outflows: $150,000
- Net Operating Cash Flow: $150,000 (Inflow)
- Investing Activities:
- Total Inflows: $20,000
- Total Outflows: $50,000
- Net Investing Cash Flow: -$30,000 (Outflow)
- Financing Activities:
- Total Inflows: $100,000
- Total Outflows: $30,000
- Net Financing Cash Flow: $70,000 (Inflow)
- Overall Cash Flow:
- Net Cash Flow: $190,000 (Inflow)
Other Approaches
- Monthly Cash Flow Analysis: Break down the analysis into monthly intervals for a more granular
view. - Forecasting: Use historical data to create future cash flow projections.
- Sensitivity Analysis: Evaluate the impact of changes in key variables on cash flow.
