The two highly important financial statements that every business organization must prepare to smoothly run the monthly cycle are -income statements and cash flow analysis statements. The income statement gives an overview of the company’s profit or net income whereas the cash flow statement throws light on the current cash position of the company.
Cash flow analysis has been an important part of the outsourced accounting services as it reflects the difference between the cash available at the beginning of an accounting period and at the end. When all the cash transactions like loan payment, cash sale of assets, monthly operating expenses, etc., are analyzed and processed, then the real financial picture comes in the front. Thus, it is essential for every business organization to run cash flow analysis to ensure – stability of cash position.
Tips for Flawless Preparation of Cash Flow Analysis Statement
Cash is the blood that pumps through business organizations to smoothly run their daily operations. Cash flow analysis is like a blood test that analyzes any kind of deficiency in the firm’s financial health. Thus, it is highly recommended by CapActix to all business organizations to run cash flow analysis and for this, they can hire accounting firms to help them out. And, accounting firms can select the option of outsourcing to offshore accounting firms to even smoothen up the process.
To have a clear view of the cash position of a business identity, it is required to perform an error-free cash flow analysis and to perform flawless analysis – the following tips will be helpful –
1.Take Accounts of Two Years into Consideration
To get a complete cash flow analysis report, the last two years of the company’s balance sheet accounts need to be put under consideration. Comparing the difference between the last two years’ cash accounts will show the right current cash position of a firm.
The complete cash flow analysis can’t be drawn without comparing some vital information like profit or loss, depreciation, information from the comparative balance sheets, current assets account, liabilities balance, etc., After analyzing the change in the two years of accounts – it will be easier to draw the current cash position correctly.
2.Find Out Breakeven Point
The best tip to prepare a flawless cash flow analysis would be determining the breakeven point of the company. It won’t impact the cash flow, but it will provide an early goal to target in the future because facing negative cash flow will be a bad thing for the business.
To determine the breakeven point, an accountant has two options either unit-based or dollar-based analysis. In both methods, fixed costs are used as a base because they are stable variables and won’t fluctuate like rent or utility bills. For the calculation of breakeven point, always start with fixed costs plus revenue for the period and subtract from variable costs. And, finally divide fixed costs by that value.
However, when you are following the dollar method, then the foremost contribution margin is calculated. To evaluate this – take the price of the commodity and eliminate variable costs and then divide fixed costs by contribution margin.
3.Always Maintain Cash Reserve
This needs to be number one tip – a sustainable amount of cash should be set aside so that business organization never runs out of it. The survival of a business depends on how you pull through cash drought time. If a certain amount is available in the bank account, then it will be smoother for businesses to manoeuver from shortfalls. The cash reserve must have the potential to survive a business expense for at least 4-6 months of time. This reserve can help the business organization to refuel their operations during the temporary market down. It will keep businesses floating when the market prices hike up.
4.Evaluate Free or Surplus Cash
Free cash flow calculation is highly beneficial for small and start-up business organizations as they always need extra cash to boost their operating system. Free cash can be simply explained as – the cash that a company has left after it pays for any capital expenditures it makes, like a new plant or equipment.
It is like an extra oxygen cylinder for the good health of business when things aren’t going as per the initial plan. The push of free cash will help businesses in becoming stronger and survive uncertain situations.
5.Focus on just Management
It is the primary tip for cash flow analysis calculators that always chase behind the breakeven point as a benchmark. Once a company reached the breakeven point, then it isn’t going to sink. Now, it will be a perfect opportunity for the analyzer to look at – accounts receivable, accounts payable, and shortfall and find any sort of issue in them.
However, if the situation arises where the companies are at the breakeven point, but their free cash flow is still tight, then it’s time to do deeper research. Here – the analyzer has to see whether the company needs to increase cash flow by acquiring a new customer or needs to cut back on the expenses and modify internal factors.
When the breakeven point has just been achieved, then it is a perfect time to make major changes because during this period even small changes will leave a major impact. Moreover, when it is properly established and the number is higher, then there’s so much on the stake that can impact the financial health of the company. Thus, once you are successful to take your client’s firm to the golden breakeven point, then it’s time to focus on cash flow management rather than profit.
6.Delegate Cash Flow Monitoring to Trustworthy Employee
It is a core tip to assign cash flow monitoring to a trustworthy employee only. The trustworthy cash analyzer should have advanced knowledge in finances, vast experience, and the ability to handle tricky situations. If your accounting firm has an employee that can handle cash flow task with the bandwidth, then go for it. However, if you don’t have a trustworthy employee in your company with the required bandwidth, then you can outsource it.
Sail Smoothly with Cash Flow Analysis
If you are able to maintain positive cash flow, then your clients will be happy with you as their business can survive now freely. To maintain a positive cash balance, it is essential to always keep income statements and balances sheets up to date. Overall, cash flow analysis is yet another highly important accounting process that needs to be catered to with vigilance.