To effectively manage your business’ finances , it is essential to monitor data and metrics about the company’s situation. To do this, it is worth using the right tools, such as cash flow. After all, it allows you to perform different financial analyses.
For management, this is important because it helps identify bottlenecks and areas for improvement, as well as being useful for proposing changes and solutions. In practice, this can lead to more effective financial decision-making.
If you are an entrepreneur or financial manager, it is essential to understand the main types of financial analysis that can be performed using cash flow.
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What is a cash flow?
An accounting instrument called cash flow is used to track and document a business’s financial activities. It displays the amount of money that a business makes, spends, and invests over a specific time frame.
Among other functions, cash flow serves to monitor the financial movements of a business. The idea is to ensure that the business operates in a healthy scenario, with more capital generation than expenses.
What are the main types of cash flow?
Knowing what cash flow is , it is worth knowing its main types. This is necessary because each of them offers specific information about the financial movements of a business. Therefore, the types of cash flow give rise to different financial analyses.
Operating cash flow
All cash inflows and outflows associated with the business’s activities are referred to as operating cash flow.
Direct cash flow
Direct cash flow includes all inflow and outflow records without considering any type of discount. Therefore, transactions are recorded gross.
Indirect cash flow
Indirect cash flow is based on the profits and losses indicated in the DRE (Income Statement) and considers depreciation and amortization.
Projected cash flow
The term “projected cash flow” describes the anticipated inflows and outflows of funds for a business during a specific time frame.
Discounted cash flow
Meanwhile, discounted cash flow estimates the value of a company by predicting its future cash flows and discounting them to arrive at a present value.
Free cash flow
The amount of money left over in the company’s cash after accounting deductions and payments is known as free cash flow. It evaluates a company’s short-, medium-, and long-term capital generation capabilities.
What financial analyses can be made based on cash flow?
Now that you know what cash flow is and what its main types are, it is easier to understand which financial analyses can be performed using this tool.
For example, by comparing income and expenses, you can analyze how the organization is doing. This way, you can draw conclusions about the current situation of the business and what the prospects are for the future.
You can also analyze whether the revenues generated generate enough cash to cover the organization’s expenses. The tool also helps you see if there is capital to invest in expanding the company.
Furthermore, cash flow can also be used to determine the business’s working capital , i.e., the amount of money the company has available to carry out its operations and meet its financial commitments.
How important are these analyses for financial management?
As you have seen, it is possible to perform several financial analyses based on cash flow. But why are they so relevant to managing a business’s resources?
Sometimes, it may seem like the company has more money than it actually has in its cash register, for example. In this situation, the business may end up spending more than it should, leading to debt.
It is worth noting that this type of analysis has other positive points, such as:
- more adequate control of finances;
- guarantee of greater predictability;
- better structuring of financial planning ;
- identification of bottlenecks and financial problems;
- checking opportunities.
- sustainable expansion of operations;
- support decision-making using data.
How do I manage my company’s cash flow?
After reviewing the information above, it is important to know how to prepare the business’ cash flow, as it will be the basis for several analyses. In this case, it is essential to record all financial transactions, whether fixed or sporadic.
It is also worth categorizing transactions, as this helps to identify sources of income and expenses. Another aspect is to create a routine to include the information, making daily updates and monitoring.
By monitoring the flow on a recurring basis, it is possible to identify points of attention and work on them. To facilitate the process, the ideal is to have financial management software.
