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How to Do a Cash Flow Analysis in Excel

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Businesses have bills to pay. But as sales and expenses are constantly in flux, so is the amount of cash a business has to make these payments. 

Cash flow analysis gives companies and stakeholders alike a snapshot of cash-on-hand, enabling them to better understand their financial position. For this reason, companies are required to file cash flow statements (along with income statements and balance sheets).

Excel is often the go-to tool for cash flow analysis, thanks to its wide availability, low cost, and potential for customization. But is Excel really the best tool for the job? 

In this article, we’ll break down how to perform cash flow analysis in Excel. We’ll also compare Excel to other tools that businesses may use to perform this type of financial analysis.

The Importance of Cash Flow Analysis

A business’ cash flow shows the amount of cash it has available after covering all of its expenses. 

In financial modeling, cash flow analysis is a vital tool for determining how changes in certain variables and different scenarios might impact cash-on-hand. For example, understanding changes in future cash flow is often used in budgeting. Businesses frequently rely on realistic cash flow estimates when planning new projects.

At a higher level, cash flow analysis is vital for understanding a company’s future financial health and performance. Investors look at cash flow to understand operations (specifically, where a company’s money is coming from and where it’s going). Creditors use cash flow to determine whether companies can afford to pay off loans and other forms of debt.

One type of cash flow analysis that companies conduct is free cash flow (FCF) analyses. This is calculated by subtracting a company’s capital expenditures from its total operating cash flow. Also known as CapEx, these expenditures go toward the purchase and maintenance of equipment and property. It’s important to note, however, that FCF doesn’t include non-cash expenses that are shown on the income statement, such as depreciation.

With that said, it’s important to stress that cash flow analysis only shows a company’s available cash at one particular moment. Negative cash flow statements do happen and aren’t necessarily a cause for alarm. For instance, if a company decides to invest in new equipment or facilities, the immediate lack of cash is made up for with future growth. Indeed, the depreciation on this equipment would be spread out over several years, reducing its sudden impact on earnings.

Consistent negative cash flows, however, could signal serious issues in a company. This might indicate that a company’s operating expenses are too high or that it’s becoming overwhelmed with debt payments. Or, perhaps, its growth hasn’t met expectations due to internal factors (over-optimistic projections) or external issues (new competitors stealing business).

Cash Flow Analysis in Excel

The best way for companies to avoid adverse situations like these is to conduct cash flow analysis. 

To get started, users need to create their own cash flow statement. The first step to do so is to consult your current cash balance—information you can gather from your most recent balance sheet.

Let’s say a financial analyst is creating their company’s first cash flow statement. The company’s current cash balance is $10,000. The analyst would also need:

  • Cash flow from operations: Cash flow related to the day-to-day running of the business, such as payroll, inventory purchases, and rent.
  • Cash flow from investments: Cash flow related to assets and other investment activities of the business, including loan payments and the purchase of new equipment.
  • Cash flow from financing: Cash flow related to banks or investors, such as dividend payments, stock buybacks, and principal loan payments.

The analyst goes on to create the following cash flow statement:

financial forecasting plate

In Excel, calculating the CFC is even more straightforward. Users simply need three cells: one for the total cash flow, one for the balance sheet, and one for the CFC formula.

Suppose the company’s financial statements are already in an Excel workbook. In that case, users simply need to adjust the formula so that the calculation references the locations of the cash flow and capital expenditures. In the above cash flow statement, CFC would be calculated by taking the $10,000 and subtracting the $6,000 in equipment investments (the capital expenditure).

When it comes to financial modeling, users often make copies of their existing spreadsheets to understand another potential outcome or scenario. For example, a company might want to understand cash flow following a drop in sales. In the event of long-term business closures (a particularly big concern in recent months), a scenario might take into account a sales drop and changes in operating expenses like utilities and payroll.

Of course, cash flow statements don’t exist in a vacuum. Changes in sales, for example, will affect profits and income, both of which are shown in the income statement. The sale of equipment would affect assets on the balance sheet. That’s why business owners who turn to Excel need to make sure all sheets and formulas they use are linked properly.

Other examples that highlight further highlight cash flow and their relationship to other financial statements include:

  • Accounts receivable: The lower a company’s accounts receivable, the more payments collected from customers—and, therefore, more cash-on-hand. Continued declines in accounts receivable could mean customers are paying on time, or they could signal a decrease in sales. In other words, a healthy cash balance doesn’t necessarily correlate to long-term growth.
  • Indirect cash flow analysis: This analysis starts with the net income from a company’s balance sheet, then adjusts for non-operating activities. Income statements are made on an accrual basis (income is reported when earned, not when collected). This amount is further adjusted for non-operational activities like depreciation.
  • Inventory value: Large purchases in supplies or raw materials will decrease cash flow and affect sales and inventory on the income sheet and balance sheet. If purchases are made in cash, the increase in the inventory’s value is subtracted from net sales, and the cash-on-hand will decrease. If purchases are made on credit, the balance sheet’s accounts payable will increase, while cash-on-hand won’t be immediately affected.

Disadvantages of Cash Flow Analysis in Excel

After walking through these steps, some disadvantages of using Excel should become apparent. Perhaps you’ve already experienced a few of them. These include:

The need to modify templates: Users can easily download templates from sources on the internet, bypassing the need to build cash flow statements from scratch. However, these templates likely require customization to work for your business in particular. Without an in-depth knowledge of the template, these modifications could lead to calculation errors that can seriously derail your projections.

Awkward handoff between users: Internal changes pose a similar risk. Companies grow, and staff changes occur. This opens up the possibility that those responsible for financial analysis will change. The more complex your Excel financial modeling spreadsheets are, the more likely newcomers will unknowingly miss key calculations that could affect cash flow.

Manual updates: Excel, for all its flexibility, is a manual tool. Each time a user wants to evaluate projections under different circumstances, they have to go into their spreadsheets and adjust said numbers by hand. This can easily lead to confusion about which scenarios the cash flow analysis represents. Saving multiple spreadsheets for each variable can similarly lead to confusion and mismanagement.

financial forecasting plate

Turn to Financial Tools for Cash Flow Analysis

There are better ways of conducting cash flow analysis than in Excel. Intelligent financial tools like Synario remove much of the manual labor from cash flow analysis, giving users more time to focus on the planning that matters. 

That’s not all. Other key advantages of financial analysis tools include:

  • Pre-mapped financial statements: Many financial modeling tools have ready-made financial statement templates, including those for cash flow statements. Unlike templates found online, these tools will typically be supported by documentation and come with customer support to help answer any questions.
  • Compatibility with existing spreadsheets: What about your existing cash flow statements in Excel? Many software tools can import existing financial information, so users don’t have to start from scratch.
  • Faster financial modeling of all types: Whether you’re looking to run complex scenario analysis or understand the relationships between certain variables, financial modeling tools streamline all activities.
  • Cloud-based operations (Synario feature): Today, remote teamwork is more important than ever. Synario, in particular, is cloud-based, meaning team members can access documents like cash flow statements regardless of their location.
  • Ability to change scenarios on the spot (Synario feature): Teams and leadership can adjust for different factors right in the boardroom, eliminating the need for re-analysis and rescheduled meetings.

Get Control of Your Company’s Cash Flow Analysis

Cash flow analyses play a pivotal role in any company’s financial planning. 

They help companies understand their ability to take on new projects. They can point to potential strains in cash flow. They offer a perspective on your business that other financial statements can’t.

Given their importance, companies should consider using the best tools around for their cash flow analyses. Tools like Synario put all your focus on understanding scenarios rather than building them. As we said, businesses have bills to pay. Intelligent financial modeling ensures that this is possible.