We know how difficult it can be to understand your business’ finances. We also know how much harder it can be to analyse those finances and make confident decisions based on them.
Cash flow analysis is one part of this process, where you examine how cash is entering and leaving your business. Understanding the factors that affect these inflows and outflows is essential. We are here to help you through this process, because with the right analysis, you can improve your financial planning and grow your business.
Why focus on a cash flow analysis?
A cash flow forecast can do more than just help you plan your day-to-day expenses. When properly created and analysed, this forecast plays an enormous role in future-proofing your business.
By keeping a close eye on your cash, your business can:
- Better maintain healthy liquidity
- Prepare for upcoming expenses
- Make more informed financial decisions
Your investors will often expect projections of at least five-years or more to show the roadmap of your growth. A short-term forecast – like a 13-week cash flow forecast – can certainly be helpful for day-to-day operations, but it doesn’t provide the long-term perspective that most investors want.
Ultimately, focusing on a cash flow forecast and analysing the forecast helps to better identify financial performance whilst paving the way to generate more cash and expand in the future.
Cash flow scenario analysis examples
The real benefit of forecasting comes when businesses begin to model their “what-if” scenarios. Scenario planning helps you to assess potential business risks, alongside helping you to prepare for new growth opportunities.
By testing a variety of different financial outcomes – whether positive or negative – you can determine the best path for your business.
A short-term analysis will help you to identify any immediate issues, like whether or not a delayed customer payment will set you back. Mid to long-term scenarios can help support those future goals, like expanding your business to new locations.
Below, we’ve listed a few practical cash flow analysis examples that apply to many types of businesses.
Example 1: What if a customer pays late?
One of the biggest difficulties for businesses is payment timing. You might know that a customer owes you money, but you might not know when that money will arrive.
Accounting systems that track unpaid invoices can help businesses analyse this risk. If any expenses rely on those payments, it’s important to model a worst-case scenario where payments are delayed.
To counter this, you can review your historical payment data, analysing the existing patterns to predict what might happen next. If your budget is tight, this analysis can quickly highlight how delays will lead to cash shortages.
Example 2: Do you have enough cash to pay taxes?
Taxes can cause pressure on cash flow if your business has failed to plan ahead. In the UK, for example, businesses collect VAT on sales and later transfer it to the government, typically every three months.
Because revenue and expenses often sit in the same account, it can be easy to spend funds that technically belong to the tax authority.
Avoiding this problem is simple. Make sure your business tracks tax liabilities as a part of their cash flow planning. Don’t commit to any major expenses before you’ve confirmed you have enough to cover any upcoming tax payments.
Example 3: How sensitive is my business to changes in supplier costs?
If your supplier changes their costs, it can significantly impact your profit and cash flow. In this scenario, we recommend sensitivity analysis.
Sensitivity analysis allows you to test how any changes in costs could affect your financial performance. For example:
- A small increase in office expenses may have little impact
- A 25% increase in the raw materials needed for your product would significantly reduce your profit margins
By modelling these scenarios, your business can better identify these types of financial vulnerabilities early. This helps to prepare you for any contingency plans, for example sourcing alternative suppliers early.
Example 4: How much do you spend on marketing to see growth?
If you have a fully-fledged business, your marketing budget might already be structured and successful. However, smaller, newer businesses can experiment with different campaigns to see what might work best.
During this experimentation phase, cash flow analysis becomes especially useful.
By forecasting your business’ marketing costs and expected revenue, you can estimate what the return on investment might be. You can then decide where to allocate your cash in a way that generates the best results without unnecessarily spending too much.
By balancing this marketing investment with your other financial priorities, you can ensure that your growth remains sustainable.
Example 5: When can you afford to expand your team?
Hiring new employees is a major milestone for any business, but it also represents one of your largest financial commitments.
The true cost of hiring a new team member is more than just their salary – it might include:
- Recruitment costs
- Employer taxes
- Benefits and insurance
- Equipment or software for new staff
By using cash flow analysis, your business can forecast when your revenue is comfortable enough to support these additional expenses. Set sales targets or revenue milestones to see when the right moment would be for that new employee.
Example 6: When should you make large capital purchases?
You might be delaying upgrading your business’ tools or equipment to save some money. However, if these items are outdated, it can actually reduce your productivity.
As your employee salaries take up a large portion of your expenses, you need to make sure that they’re providing the best returns that they can.
Cash flow forecasting helps identify the best time to invest in large capital purchases, such as new computers or machinery. Planning these purchases in advance and spreading them out over time can reduce the financial strain on the business.
Using scenario modelling in financial planning
Your business can explore a huge variety of cash flow analysis scenarios to better understand its financial future. Asking “what-if” questions allows you to evaluate any potential outcome and prepare for change.
Effective cash flow analysis helps businesses:
- Avoid running out of cash
- Identify and reduce financial risks
- Understand how much to invest in growth
- Determine the safest time to spend money
Forecasting cash flow across a variety of periods gives your business a solid foundation for strategic decision-making. With better visibility into financial performance, you can allocate resources more confidently and grow more efficiently.
If you’re just getting started with cash flow analysis, you might want to keep it simple with our cash flow forecasting template. You may also want to get started with Brixx. Try a free 7-day trial now.
