Get More Out of Cash Flow Statement Analysis

Remember Cuba Gooding Jr.’s line in Jerry Maguire? “Show me the money!” 

Well, that’s essentially what a cash flow statement does. Vital to examining an organization’s liquidity and financial sustainability, cash flow statements show exactly how a business generates and spends cash.

All organizations—from universities and hospitals to manufacturers and financial firms—need to take control of their cash inflows and outflows. That means mastering cash flow statement analysis (and optimizing your operations accordingly).

Let’s dive deeper into how to perform cash flow statement analysis and take a look at how your organization can benefit from using this financial statement correctly.

The purpose and importance of cash flow statements

There’s a reason why they say “cash is king:” no organization can operate without solid cash flow.

The research doesn’t lie about just how important cash flow is. According to a U.S. Bank study, 82% of small business failures stem from poor cash flow management.

As you can see, cash flow matters. That’s why, for public entities, a cash flow statement is one of the three financial statements they must report to shareholders, along with balance sheets and income statements.

While income statements detail whether you made a profit and balance sheets show a company’s assets and liabilities, cash flow statements unveil whether you have money to show for it. At the bottom, just above the closing balance, the statement either displays a net increase or decrease in cash for a specific period. 

Furthermore, an income statement measures revenue against expenses—even if some revenue and expenses haven’t been collected or paid. This is because income statements use accrual basis accounting, while cash flow statements use cash basis accounting. Cash basis accounting, on the other hand, only counts the money once it comes into or leaves your account. 

By showing you how much cash you have in relation to your income, a cash flow statement offers insights into how well you’re running your company or organization and empowers you to make improvements. 

Note: For a cash statement to be useful, it must change in real-time. After all, the data it uses from balance sheets and income statements update continuously.

The Hart Telephone Company example

As a small, rural telecommunications firm, Hart Telephone Company (HTC) faced hurdles when it came to balancing the challenges of meeting operational and personnel expenses, complying with Federal Communications Commission (FCC) regulations, and providing customers with the best possible service.

In order to receive government grants and get accurate revenue from the National Exchange Carrier Association (NECA), they needed to better forecast their future cash flows and estimate settlement costs. 

To display their financials, HTC used a product that wasn’t able to create rolling cash flow statements. This meant they couldn’t provide a general sense of long-term cash flow projections. Without real-time cash flow statement analysis and forecasts, it became hard to decide if investments in certain infrastructure and services made sense. 

Looking for a more intelligent cash flow statement analysis, HTC switched to Synario. Using Synario’s cash flow analysis software, HTC was able to create dynamic present, near-future, and long-term cash flow projections. 

And because Synario’s cash flow statement analysis allows for seamless updates and can analyze different scenarios at once, HTC was able to see how cash flow forecasts changed in the present and how cash flows would change in the future if X, Y, or Z happened. 

Having such a robust cash flow statement analysis has led to better decision-making. As Melissa Green, CFO of HTC, said:

“We sit down every October with stakeholders to plan out our capital build for the next year, including what types of services we’re going to be offering to our customers, and it’s only because we have the cash flow statement in Synario that I am able to do that."

How cash flow statements work

Cash flow statement analysis can be done annually, quarterly, monthly, or even on a rolling basis. If you have the tools to do cash flow statement analysis on a rolling basis, we’d advise doing so. 

First, you need to understand that a cash flow statement has three main categories:

• Operating activities: This can include income, accounts payable, accounts receivable, depreciation, etc.
• Investing activities: This can include expenditures for investments, such as land, real estate, and securities, as well as things like equipment purchases.
• Financing activities: This can include payments to investors (such as interest on loans) and shareholders (such as dividends), as well as inflows from raising funds through bond sales or equity issuance. 

The sum of these three categories gives you the closing balance on cash for a period or quarter. If it’s negative, you’ve lost cash for that period. If the sum is positive, you’ve gained cash for that period.

Example of a cash flow statement

To help you better picture how cash flow statement analysis should work, let’s use the example of a retail store. Red categories indicate that the number should be subtracted from the total. Note that the company had $100,000 cash on hand going into 2019. 

Based on this cash flow statement, the company had $1.39 million in cash going into 2020. Handling 2019 better than previous years meant this retail store had a bigger cushion to help them endure the worst of the COVID-19 pandemic. 

Unpredictable events like the pandemic are exactly why you need reliable cash flow statement analysis that enables you to adjust to any scenario.

The problem with most cash flow statement analysis

Cash flow statement analysis isn’t as difficult to grasp as some other types of financial modeling. However, to get the most out of it, you need financial solutions that can integrate data from income statements, balance sheets, and cash flow statements. Otherwise, you’ll be left playing catch up and without an accurate picture of your present and future cash flows.

So, while you can perform cash flow statement analysis within Excel spreadsheets, the fact is that doing so puts yourself at an unnecessary disadvantage. When you use a spreadsheet to create a cash flow statement, you must:

• Reconcile data across multiple spreadsheets: Not only does this leave your financial models vulnerable to human error, it’s also a massive waste of resources.
• Check whether the formulas are right: When new data arises, you may have to change the underlying math. Again, this wastes time and risks corrupting the entire financial model. 
• Create multiple spreadsheets for different scenarios: Your cash flow projections must plan for all potential future scenarios. How else could you prepare for something like COVID-19? With spreadsheets, this task becomes time-consuming and mistake-prone, and the model will still be incapable of real-time updates. 

Furthermore, cash flow statement analysis too often looks in the rearview mirror. Yes, past trends can indicate future performance. However, you need a robust, forward-looking cash flow statement analysis in order to put yourself in the best position for success. 

Ultimately, traditional spreadsheets can derail your organization by leaving you with cash flow statements that don’t give the whole picture, or worse—they can contain errors that lead you to make the wrong decisions for your business.

The solution for cash flow statements

What you need is a cash flow statement that connects every element of your business or organization. Any cash-based changes should flow from one financial statement automatically, without the need to manually change individual cells. This way, you get the right picture of your cash flows (and your company’s position) in real time. 

The solution should also go beyond standard cash flow statement analysis and provide:

• Cash flow insights over multiple time horizons, so you can plan for the next quarter (and the next five years)
• Forecasts for multiple futures, so you can perform effective scenario planning and understand all the ways your cash flow could trend
• Discounted cash flows, to enable you to see the present value of your investments

Know which way the cash should flow with Synario

It’s time to ditch the spreadsheets and put a more powerful tool to use. 

Synario, the intelligent financial modeling software solution, enables analysts and business owners alike to create comprehensive cash flow statements over any time period. It’s an out-of-the-box solution that can be customized to meet your organization’s unique needs—without having to change the underlying formulas. 

Thanks to integrated financial statements, powerful layering technology, and pre-mapped accounting, you can create financial models that output detailed cash flow statement analysis and forecasts for any scenario. 

With such a tool in hand, you can better manage your cash flow, propelling your organization to a more successful future.