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Every business worries about cash flow—after all, it’s the lifeblood of everything from factories to hospitals, startups to multinational companies.
Cash flow statements help decision-makers visualize an organization’s financial health: including revenue, expenditures, investments, liquidity, and more.
For big public companies, cash flow statements can be a determining factor in valuation and investment. For smaller businesses, cash flow statements can be life or death (in fact, 82% of small businesses fail due to inadequate cash flow management). All companies use cash flow statements for internal and external decisions—to determine if it’s time to hire new employees or consider a smaller office.
Cash flow statements are broken into three categories:
- Operating activities: Day-to-day revenue and expenditures, including income, accounts payable, and accounts receivable
- Investing activities: Long-term cash allocations (such as real estate, land, and equipment) and investments in other companies and securities
- Financing activities: Expenditures to investors and shareholders (like interest and dividends) as well as revenue from fundraising activities (like issuing bonds)
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Your cash flow statement evaluates if you’re cash positive or cash negative across the sum of these three categories every quarter.
But cash flow statements are living, breathing documents. Even though they’re issued every quarter, they can change dramatically on a day-to-day or even minute-to-minute basis. Keeping your statements up-to-date, especially if you’re using spreadsheets, can be an absolute nightmare.
Using multiple spreadsheets to cover your data means managing and reconciling data across multiple spreadsheets. It’s a huge time suck and leaves things vulnerable to human error, especially if you’re juggling various formulas.
If you’re making cash flow projections? Things only get more complicated. Static spreadsheets are too constraining. They require more human capital resources while exposing financial models to more human error.
Ideally, cash flow statements should dynamically adjust, no matter the assumptions or time series, to seamlessly forecast the future in real-time so that decision-makers can get clear insights into their operations.
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What does cash flow analysis look like?
A cash flow analysis is like a trip to the doctor’s office for your business. It’s a chance to see if everything is functioning as it should and if there are things you should be looking out for in the future.
And just as different patients come to the same doctor with various concerns, business decision-makers are looking for specific answers using cash flow analysis. Whether operating, financing, or investing, cash flow analysis has relevant insights.
Take, for example, operating cash flow, which is a percentage that represents how much a company will make over a certain period.
Compare this with free cash flow, which is tied to profitability. It answers the question, “How much is left over for new projects and company bonuses?”
If you’re running a business, these insights can help you steer towards sustained profitability. And when things are going well, you have clear choices for how to invest your excess profits. Maybe you have enough to:
- Hire a new team
- Upgrade your facility
- Pay out dividends to shareholders
Cash flow analysis can also indicate serious red flags. It can highlight deficits in specific business areas or a slowdown in a quarterly sales cycle. You might have to make some hard decisions before things get worse, like:
- Pausing certain initiatives
- Initiating a hiring freeze
- Laying off employees
As an investor, cash flow analysis is also an excellent way to determine whether acquiring another company is worth it. Diminishing profitability year-over-year can be an indication of a sinking ship and dwindling dividend payouts. Meanwhile, a surplus of cash flow could mean a higher valuation.
Consider fictional Company J&J Doe Enterprises:
| J&J Doe Enterprises | December 2020 |
| Operating activities | Cash flows |
| Net income | $55,000 |
| Depreciation | 15,000 |
| Increase in accounts payable | 5,000 |
| Increase in accounts receivable | -55,000 |
| Increase in inventory | -35,000 |
| Net cash flow from operations | -$15,000 |
| Investing activities | Cash flows |
| Equipment | -10,000 |
| Net cash flow from investing | -$10,000 |
| Financing activities | Cash flows |
| Notes payable | 65,000 |
| Net cash flow from financing | 65,000 |
| Cash flow for the month | $40,000 |
At a glance, we see their cash flow for the month is a net positive ($40,000 for the month). Are they doing well? Not necessarily. It’s important to analyze every aspect of the cash flow statement to generate a proper analysis.
Upon a closer inspection, we discover their operating activities are negative (-$15,000). So, how are they ultimately net positive? Check the financing activities: they just raised $65,000.
If you want more examples of cash flow analysis and how you can analyze your cash flow statement, read on:
How to do a cash flow analysis in Excel
Most companies start out doing cash flow analysis in Excel. While we’ve already mentioned some of the downsides of using traditional spreadsheets, it doesn’t mean that they don’t have their uses. Understanding the fundamentals of Excel-based cash flow analysis can be useful.
How do you create a cash flow analysis in Excel? Start with the essentials:
- Operations cash flow: This covers the ins and outs of everyday revenue and expenses, like payroll and inventory sales.
- Investment cash flow: Here, we have assets and investments, like equipment and mortgage payments.
- Financing cash flow: This is cash tied to banks or investors, loan payments, and dividend payouts.
Then, you would create something that looks like this:
This is a bare-bones example of a simple cash flow statement. Creating this in Excel is pretty straightforward as it involves simple inputs and analysis.
However, once financial modeling enters the picture, Excel’s usefulness begins to wane.
For financial modeling, businesses will make multiple copies of their spreadsheets to test various scenarios. For instance, what would happen if there is a new global pandemic? Or what if your company could close twice as many clients per quarter?
For instance, a new salesperson would cost more in terms of operational capacity, but they can bring in more revenue. However, that revenue may not be realized in the first or even second quarter they’re hired.
This is where the problems start to arise, and spreadsheets don’t offer a simple solution. Some of the most glaring issues include:
- Templates: Thousands of templates exist online, but they often require heavy customization and in-depth knowledge of algorithms. Without the time and experience needed to manage these, templates can be more of a curse than a blessing.
- Multiple Users: As companies grow and change, legacy shared spreadsheets can quickly become compromised, leading to poor decision-making. Even small changes can have unexpected implications, especially when different collaborators are viewing and editing discrete spreadsheets. Keeping track of file sharing permissions across different versions can be a nightmare.
- Manual Everything: Although Excel does have a wide range of capabilities, it’s ultimately a do-it-yourself tool. Every change and adaptation requires manual adjustments. Most people will create new spreadsheets for each question that needs answering, which can become cumbersome.
Frankly, there are better ways of conducting financial analysis. If you’re ready to upgrade from Excel, read on:
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