Nine methods to analyze and optimize your cash flow


While there are many financial metrics to track in the business, cash flow from operations is among the most critical. Many entrepreneurs see these numbers as an indication of how well (or poorly) their business is performing, as uncovering patterns or trends in results can help business leaders fill in gaps or develop their strengths.

To learn more about what to look for, we asked members of Forbes Financial Council share their methods of analyzing an organization’s operating cash flow, as well as why they prefer the approach. Here’s what they said:

Photos courtesy of individual members.

1. Look at the operations, investments and financing

The best way to analyze your cash flow is to divide your financial statements into three sections: operations, investments, and financing. From there, calculate the operating cash flow to sales ratio to understand how much each dollar of sales represents in revenue. Go through each section to better understand where your money is going in and out, and what areas can be best budgeted for. – Jared weitz, United Source of Capital Inc.

2. Simplify your cash cycle

We deal with many “mom and pop” businesses whose owners often don’t have much formal training or experience in finance or accounting. Particularly for them, we like the relative simplicity of the cash cycle, measured in days. The beauty of this calculation is that everyone knows the calendars, so translating the investment level into days can be universally appreciated. – Jay offerdahl, Viking mergers and acquisitions

3. Make influx and collections a priority

Cash flow is the best indicator to develop when analyzing cash flow from operations. Businesses need to closely monitor accounts receivable and overdue sales days, and they also need to offer early payment discounts and be pleasantly persistent in collections. Remember, your good customers want you to win, too, and setting payment expectations early will help control operating cash flow. – Maryanne Morrow, 9th speed technologies

4. Compare your actual numbers to projections

Comparing your monthly or quarterly actuals with your forecasted cash flow as the year progresses makes it possible to choose wisely new expenses or investment opportunities. Having a COO and CFO who knows the numbers and trends is invaluable and an important qualitative factor in cash flow planning. – David Miller, PeachCap Inc.

5. Take advantage of financial planning and analysis tools

The most important financial metric changes depending on the industry and stage of the business. For businesses of all sizes, modern financial planning and analysis tools provide fast and robust analysis. Now, even for a smaller business with less cash, the new FPA tools offer analytical sophistication that was previously only available to large businesses, but at a much lower cost. – Anderson Thees, Red dot events

6. Analyze your liquidity ratios

To increase regular cash flow, first look at your liquidity ratios, especially accounts receivable and accounts payable turnover. Usually A / R shows you how fast you get paid and A / P shows how fast you spend money. If your A / P turnover is 30 days and your A / R turnover is 60 days, there is room for improvement. Ideally, your cash inflows (A / R payments) would come in faster than your cash outflows (A / P payments). – Chris Tierney, Moore Colson CPA and Consultants

7. Categorize your income and define KPIs for each

Separate your business income into categories that match your sources of income. Often times people leave it as “income”. However, if you have four different divisions, separate those positions to better determine the KPIs in the future. Second, break down your expenses into non-essential and essential expenses. When times get tough or profitable, you can take action quickly and effectively. – Justin goodbread, Heritage investors

8. Examine the seasonality of your income

It is essential to examine the trends from year to year and the seasonality of your income. This may vary depending on the products or industries you serve, weather conditions, and other regional events. Incorporating seasonality will ensure you don’t get caught upside down with your cash flow. – Anthony Holder, C&H Financial Services, Inc.

9. Follow the indirect method

The best method to analyze operating cash flow is the indirect method, where net income is adjusted to obtain operating cash flow. This allows the company to understand the main factors influencing OCF. For example, there may be high accounts receivable which resulted in high income but low cash flow. This surpasses the direct method, which only takes into account the difference between cash inflows and outflows. – Atish Davda, EquityZen

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