Mohamed Samir Rashed CMA , IFRS
Mohamed Samir Rashed CMA , IFRS
Contents
Preface .................................................................................................................................................... 3
What Is Cash Flow Analysis? .................................................................................................................. 4
Cash Flow Analysis Explained ................................................................................................................ 5
Why Is Cash Flow Analysis Important? .................................................................................................. 7
Cash Flow Analysis Basics ...................................................................................................................... 9
How Do You Perform Cash Flow Analysis? .......................................................................................... 10
Preparing a Cash Flow Statement ........................................................................................................ 10
Cash Flow Analysis Example ................................................................................................................ 12
Five Steps to Cash Flow Analysis.......................................................................................................... 13
Cash Flow Analysis Is Critical for Every Business ................................................................................. 16
Cash Flow Statement ............................................................................................................................ 17
Cash Flow From Operations ............................................................................................................. 17
Cash Flow From Investing................................................................................................................. 17
Cash Flow From Financing ................................................................................................................ 18
Mohamed Samir Rashed CMA , IFRS
Preface
Cash flow is the amount of cash and cash equivalents, such as
securities, that a business generates or spends over a set time
period. Cash on hand determines a company’s runway—the more
cash on hand and the lower the cash burn rate, the more room a
business has to maneuver and, normally, the higher its valuation.
Cash flow differs from profit. Cash flow refers to the money that
flows in and out of your business. Profit, however, is the money you
have after deducting your business expenses from overall revenue.
Mohamed Samir Rashed CMA , IFRS
What Is Cash Flow Analysis?
There are three cash flow types that companies should track and
analyze to determine the liquidity and solvency of the business: cash
flow from operating activities, cash flow from investing activities and
cash flow from financing activities. All three are included on a
company’s cash flow statement.
In conducting a cash flow analysis, businesses correlate line items in
those three cash flow categories to see where money is coming in,
and where it’s going out. From this, they can draw conclusions about
the current state of the business.
Depending on the type of cash flow, bringing in money in isn’t
necessarily a good thing. And, spending money it isn’t necessarily a
bad thing.
Mohamed Samir Rashed CMA , IFRS
Cash Flow Analysis Explained
Cash flow is a measure of how much cash a business brought in or
spent in total over a period of time. Cash flow is typically broken
down into cash flow from operating activities, investing activities, and
financing activities on the statement of cash flows, a common
financial statement.
While it’s also important to look at business profitability on the
income statement, cash flow analysis offers critical information on
the financial health of a company. It tells you if cash inflows are
coming from sales, loans, or investors, and similar information about
outflows. Most businesses can sustain a temporary period of
negative cash flows, but can’t sustain negative cash flows long-term.
Newer businesses may experience negative cash flow from
operations due to high spending on growth. That’s okay if investors
and lenders are willing to keep supporting the business. But
eventually, cash flow from operations must turn positive to keep the
business open as a going concern.
Cash flow analysis helps you understand if a business’s healthy bank
account balance is from sales, debt, or other financing. This type of
analysis may uncover unexpected problems, or it may show a healthy
Mohamed Samir Rashed CMA , IFRS
operating cash flow. But you don’t know either way until you review
your cash flow statements or perform a cash flow analysis.
In addition to looking at the standard cash flow statement and
details, it’s often also useful to calculate different versions of cash
flow to give you additional insights. For example, free cash flow
excludes non-cash expenses and interest payments and adds in
changes in working capital, which gives you a clearer view of
operating cash flows. Unlevered free cash flow shows you cash flow
before financial obligations while levered free cash flow explains cash
flow after taking into account all bills and obligations.
Depending on the size of your company, your financial situation, and
your financial goals, reviewing and tracking various forms of cash
flow may be very helpful in financial planning and preparing for
future quarters, years, and even a potential downturn in sales or
economic conditions.
Mohamed Samir Rashed CMA , IFRS
Why Is Cash Flow Analysis Important?
A cash flow analysis determines a company’s working capital — the
amount of money available to run business operations and complete
transactions. That is calculated as current assets (cash or near-cash
assets, like notes receivable) minus current liabilities (liabilities due
during the upcoming accounting period).
Cash flow analysis helps you understand if your business is able to
pay its bills and generate enough cash to continue operating
indefinitely. Long-term negative cash flow situations can indicate a
potential bankruptcy while continual positive cash flow is often a sign
of good things to come.
There are two forms of accounting that determine how cash moves
within a company's financial statements. They are accrual accounting
and cash accounting.
Mohamed Samir Rashed CMA , IFRS
Accrual accounting is used by most public companies and is the
accounting method where revenue is reported as income when it's
earned rather than when the company receives payment. Expenses
are reported when incurred, even though no cash payments have
been made.
For example, if a company records a sale, the revenue is recognized
on the income statement, but the company may not receive cash
until a later date. From an accounting standpoint, the company
would be earning a profit on the income statement and be paying
income taxes on it. However, no cash would have been exchanged.
Also, the transaction would likely be an outflow of cash initially, since
it costs money for the company to buy inventory and manufacture
the product to be sold. It's common for businesses to extend terms
of 30, 60, or even 90 days for a customer to pay the invoice. The sale
would be an accounts receivable with no impact on cash until
collected.
Cash accounting is an accounting method in which payment receipts
are recorded during the period they are received, and expenses are
recorded in the period in which they are paid. In other words,
revenues and expenses are recorded when cash is received and paid,
respectively.
Mohamed Samir Rashed CMA , IFRS
Cash Flow Analysis Basics
Cash flow analysis first requires that a company generate cash
statements about operating cash flow, investing cash flow and
financing cash flow.
Cash from operating activities represents cash received from
customers less the amount spent on operating expenses. In this
bucket are annual, recurring expenses such as salaries, utilities,
supplies and rent.
Investing activities reflect funds spent on fixed assets and financial
instruments. These are long-term, or capital investments, and include
property, assets in a plant or the purchase of stock or securities of
another company.
Financing cash flow is funding that comes from a company’s owners,
investors and creditors. It is classified as debt, equity and dividend
transactions on the cash flow statement.
Mohamed Samir Rashed CMA , IFRS
How Do You Perform Cash Flow Analysis?
To perform a cash flow analysis, you must first prepare operating,
investing and financing cash flow statements. Generally, the finance
team uses the company’s accounting software to generate these
statements. Alternately, there are a number of free templates
available.
Preparing a Cash Flow Statement
Let’s first look at preparing the operating cash flow statement. The
line items that are factored into the company’s net income and are
included on the company’s operating cash flow statement include but
are not limited to:
Cash received from sales of goods or services
The purchase of inventory or supplies
Employees’ wages and cash bonuses
Payments to contractors
Utility bills, rent or lease payments
Interest paid on loans and other long-term debt and interest received
on loans
Fines or cash settlements from lawsuits
Mohamed Samir Rashed CMA , IFRS
There are two common methods used to calculate and prepare the
operating activities section of cash flow statements.
The Cash Flow Statement Direct Method takes all cash collections
from operating activities and subtracts all of the cash disbursements
from the operating activities to get the net income.
The Cash Flow Statement Indirect Method starts with net income and
adds or deducts from that amount for non-cash revenue and expense
items.
The next component of a cash flow statement is investing cash flow.
That bottom line is calculated by adding the money received from the
sale of assets, paying back loans or selling stock and subtracting
money spent to buy assets, stock or loans outstanding.
Finally, financing cash flow is the money moving between a company
and its owners, investors and creditors.
Mohamed Samir Rashed CMA , IFRS
Cash Flow Analysis Example
Net income adjusted for non-cash items such as depreciation
expenses and cash provided for operating assets and liabilities. Using
a free public template from the Small Business Administration (SBA),
let’s say Wild Bill’s Dog Trainers and Walkers had a net income of
$100,000 to start and generated additional cash inflows of $220,000.
As you can see in the spreadsheet, it spent $41,000 on operating
cash outflows like hiring an additional person, buying new equipment
for the dog park, paying taxes and more. The owner paid some
principal down on a loan and took a draw of $50,000 for an ending
cash balance of $127,200. Small changes in any of those line items
show the impact of hiring more people, paying more taxes, buying
more equipment and more to ensure the business has a healthy
balance sheet and doesn’t go “into the red.”
Mohamed Samir Rashed CMA , IFRS
Five Steps to Cash Flow Analysis
There are a few major items to look out for trends and outliers that
can tell you a lot about the health of the business.
Aim for positive cash flow
When operating income exceeds net income, it’s a strong indicator of
a company’s ability to remain solvent and sustainably grow its
operations.
Be circumspect about positive cash flow
On the other hand, positive investing cash flow and negative
operating cash flow could signal problems. For example, it could
indicate a company is selling off assets to pay its operating expenses,
which is not always sustainable.
Analyze your negative cash flow
When it comes to investing cash flow analysis, negative cash flow
isn’t necessarily a bad thing. It could mean the business is making
investments in property and equipment to make more products. A
positive operating cash flow and a negative investing cash flow could
mean the company is making money and spending it to grow.
Mohamed Samir Rashed CMA , IFRS
Calculate your free cash flow
What you have left after you pay for operating expenditures and
capital expenditures is free cash flow. This can be used to pay down
principal, interest, buy back stock or acquire another company.
Operating cash flow margin builds trust
The operating cash flow margin ratio measures cash from operating
activities as a percentage of sales revenue in a given period. A
positive margin demonstrates profitability, efficiency and earnings
quality.
Cash flow analysis helps your finance team better manage cash
inflow and cash outflow, ensuring that there will be enough money to
run—and grow—the business.
Analyze Cash Flow With Software
The math behind a free cash flow analysis can be complex,
particularly for large companies or those with complex finances.
However, bookkeeping or accounting software, sometimes part of a
larger ERP, take care of much of the heavy lifting for you. Once your
reports are setup in an ERP like Oracle NetSuite, your cash flow, free
Mohamed Samir Rashed CMA , IFRS
cash flow, and other numbers, and the underlying details, are just a
few clicks away.
Large companies employ teams of financial planning and analysis
(FP&A) professionals who spend their entire workday digging into the
details of financial results looking for patterns and opportunities to
improve results. With a powerful ERP available, much of that process
is automated, allowing you to do more with fewer staff.
Small businesses and large enterprises alike should understand their
cash flow and cash position with regular check-ins. NetSuite helps
you achieve better results through automated reporting, machine
learning and AI-driven analysis, and extensive financial analysis tools
to give you accurate, timely information about your business.
Mohamed Samir Rashed CMA , IFRS
Cash Flow Analysis Is Critical for Every Business
Savvy investors would never buy the stock of a company without first
looking at its financial statements, including cash flow. A more
detailed cash flow analysis — provided through ERP and advanced
accounting software — offers insights into the financial health and
future performance of a business. Business owners, managers, and
executives should look at similar data on their companies on a
regular basis to ensure it’s on track to meet its short-term and longterm financial goals.
Cash flow and cash flow analysis are important for virtually every
business. Working without cash flow knowledge is like a pilot flying
blind. Never run your business without updated, accurate cash flow
data.
Mohamed Samir Rashed CMA , IFRS
Cash Flow Statement
A cash flow statement has three distinct sections, each of which
relates to a particular component—operations, investing, and
financing—of a company's business activities. Below is the typical
format of a cash flow statement.
Cash Flow From Operations
This section reports the amount of cash from the income statement
that was originally reported on an accrual basis. A few of the items
included in this section are accounts receivables, accounts payables,
and income taxes payable.
If a client pays a receivable, it would be recorded as cash from
operations. Changes in current assets or current liabilities (items due
in one year or less) are recorded as cash flow from operations.
Cash Flow From Investing
This section records the cash flow from sales and purchases of longterm investments like fixed assets that include property, plant, and
equipment. Items included in this section are purchases of vehicles,
furniture, buildings, or land.
Mohamed Samir Rashed CMA , IFRS
Typically, investing transactions generate cash outflows, such as
capital expenditures for plant, property, and equipment; business
acquisitions; and the purchase of investment securities.
Cash inflows come from the sale of assets, businesses, and securities.
Investors typically monitor capital expenditures used for the
maintenance of, and additions to, a company's physical assets to
support the company's operation and competitiveness. In short,
investors can see how a company is investing in itself.
Cash Flow From Financing
Debt and equity transactions are reported in this section. Any cash
flows that include payment of dividends, the repurchase or sale of
stocks, and bonds would be considered cash flow from financing
activities. Cash received from taking out a loan or cash used to pay
down long-term debt would be recorded in this section.
For investors who prefer dividend-paying companies, this section is
important since it shows cash dividends paid since cash, not net
income, is used to pay dividends to shareholders.