Cash Flow Analysis
The statement of cash flows shows where money comes from and where it goes. Understanding cash flow helps with forecasting, planning, and determining debt capacity.
Understanding Your Cash Flow
The statement of cash flows shows where money comes from (inflows) and where it goes (outflows)-from operations, investments, and financing activities. Understanding cash flow helps with forecasting, planning revenue, managing expenses, and determining debt capacity.
Without strong cash flow, even profitable businesses can run into trouble-if cash is tied up in receivables, inventory, or long wait periods for payments. Cash flow analysis is a foundational tool for strategic growth and stability.
Key Metrics We Analyze
Debt-to-Equity Ratio
Measures how much borrowing versus owners' stake. Too high means financial risk; too low may mean under-leveraged.
Total Debt / EBITDA
Shows how many years of EBITDA would pay off debt. Lower is safer; high means significant debt burden.
Cash Interest Coverage
How many times operating cash covers interest expense. If less than 1, the company can't pay interest from operations alone.
EBITDA-CapEx / Interest
Available cash after reinvesting versus interest needs. Positive and sizable is better; negative or small is risky.
Fixed-Charge Coverage Ratio
Broad coverage of all fixed obligations (lease, debt, taxes, distributions). Lower ratios mean less cushion.
Why Cash Flow Analysis Matters
Analyzing cash flow gives business owners, lenders, insurers, and investors a clearer picture of financial health. It helps with:
- Determine your debt capacity-how much debt you can safely take on
- Assess risk and ability to fulfill interest obligations
- Forecast low-cash periods and plan investments
- Spot trends, shifts in revenue, or warning signs early
- Make informed decisions about scaling operations
Best Practices
- Review monthly: Reviewing cash flow isn't just a once-a-year activity. Monthly reviews help you detect patterns-sudden drops in revenue, delayed payables, or spiking expenses.
- Don't make hasty cuts: When cash flow is tight, cuts in marketing or service lines might seem like immediate wins. But these could backfire if done without a full picture of cash impacts.
- Plan for seasonality: If your business has seasonal fluctuations, cash flow analysis helps you prepare for low periods and capitalize on high periods.
Analyze Your Cash Flow
Get a clear picture of your cash position and make better financial decisions. Contact us to get started.