Cash flow analysis: How to make smarter decisions with your company’s cash

Whether you’re running a lean startup or managing multiple departments, understanding your company’s cash flow isn't just a finance task. Knowing how to do a cash flow analysis gives you the insight to stay agile, allocate resources wisely, and avoid surprise shortfalls.

In this guide, we’ll break down what a cash flow analysis is, how to do one, and how to use it to make confident business decisions.

What is a cash flow analysis?

A cash flow analysis is the process of reviewing and understanding how money moves in and out of your business over a period of time.

Cash flow analyses involve examining:

• Operating activities: Your core business revenue and expenses
• Investing activities: Purchases or sales of assets, like equipment or property
• Financing activities: Loans, credit lines, equity financing, and repayments

Together, these activities form your cash flow statement. By analyzing this statement, you gain visibility into how much cash you actually have on hand—and whether your business is generating or losing money over time.

Why cash flow analysis matters (especially for growing businesses)

Unlike net income, cash flow tells you whether you can pay your bills, make payroll, or reinvest in growth right now. 

Even profitable companies can struggle if cash is tied up in receivables or long-term projects.

Conducting routine cash flow analyses helps you:

• Forecast shortfalls before they happen
• Prioritize spending based on real-time liquidity
• Plan for growth with confidence
• Manage burn rate more strategically
• Build credibility with investors and lenders

How to do a cash flow analysis step by step

Thankfully, you don’t need to be a finance expert to get started. Here’s how to do a basic cash flow analysis:

1. Start with your cash flow statement

If you use accounting software or tools like Rho, this should be available automatically. Otherwise, pull your cash flow statement manually from your accounting records.

Break the cash flow statement into three parts:

1. Cash from operations: Revenue, cost of goods sold, operating expenses
2. Cash from investing: Purchases/sales of physical assets or investments
3. Cash from financing: Loans, repayments, shareholder investments

2. Calculate net cash flow

Next, use this formula:

Net cash flow = Cash inflows - Cash outflows

This tells you whether you ended the period with more or less cash than you started with.

3. Look for patterns and red flags

Once you calculate your net cash flow, the next step is to figure out what those numbers actually mean.

Questions to ask:

• Are operating cash flows consistently positive?
• Are cash reserves shrinking month over month?
• Are you financing operations with debt or equity?
• Are large investments draining your liquidity?

4. Build a cash flow forecast

Cash flow forecasting is about looking ahead—so you’re not just reacting to shortfalls, but actively planning for what’s coming. 

Once you understand your historical cash position, use that data to model inflows and outflows over the next 3–6 months. Include your sales pipeline, fixed and variable expenses, upcoming payments, and expected receivables.

Done well, this gives you a real-time view of how decisions today will affect liquidity tomorrow. 

If this sounds like too much work, automate it! Rho’s cash management tools can help automate this process by syncing transactions, projecting future spend, and flagging potential gaps before they become a problem.

Other cash flow metrics to monitor

Once you've conducted a basic cash flow analysis, tracking specific metrics can provide deeper insights into your company's financial health and operational efficiency. 

Here are some essential metrics to consider:​

1 - Operating Cash Flow (OCF)

OCF measures the cash generated from regular business operations. A positive OCF indicates that the company can generate sufficient cash to maintain and grow its operations.​

Formula:

OCF = Net Income + Non-Cash Expenses + Changes in Working Capital​

2 - Free Cash Flow (FCF)

FCF represents the cash available after accounting for capital expenditures. It's a key indicator of a company's ability to generate additional revenues.​

Formula:

FCF = Operating Cash Flow – Capital Expenditures​

3 - Cash Conversion Cycle (CCC)

CCC measures the time taken to convert inventory investments into cash from sales. A shorter CCC indicates efficient cash flow management.​

Formula:

CCC = Days Inventory Outstanding + Days Sales Outstanding – Days Payable Outstanding​

4 - Working Capital Ratio

This ratio assesses a company's short-term financial health by comparing current assets to current liabilities. A ratio above 1 suggests that the company can cover its short-term obligations.​

Formula:

Working Capital Ratio = Current Assets / Current Liabilities​

5 - Cash Flow Margin

This metric indicates how efficiently a company converts sales into cash. A higher margin suggests better cash flow efficiency.​

Formula:

Cash Flow Margin = Operating Cash Flow / Net Sales​

By regularly monitoring these metrics, businesses can make informed decisions, identify potential issues early, and ensure long-term financial stability.​

How to work with these cash flow metrics

Metrics are only useful if they help you make smarter, faster decisions—and cash flow analysis is where those decisions often begin. 

Once you've calculated the key cash flow metrics, here are a few ways to apply them in your day-to-day operations:

• Set meaningful benchmarks: Use past data and industry norms to define healthy targets for OCF, FCF, and CCC. For example, a consistently positive operating cash flow might become your baseline for scaling spend.
• Identify performance trends: Cash flow margin trending downward? That could suggest rising costs or slowing collections—both signals that warrant further analysis.
• Make smarter capital allocation choices: Free cash flow helps you decide how aggressively to invest in hiring, product, or marketing versus building reserves or reducing debt.
• Tighten up operational efficiency: A growing cash conversion cycle might indicate you need to improve inventory turnover, billing processes, or vendor payment terms.

When integrated into your regular cash flow analysis, these metrics become more than diagnostic tools—they become part of a continuous improvement loop. 

And when paired with real-time data from Rho, you get a dynamic, always-current view of your financial health.

Final FAQs about cash flow analysis

What is the difference between cash flow and profit?

Cash flow measures actual cash in and out. Profit is accounting income, which may include non-cash items like depreciation.

How often should I do a cash flow analysis?

Monthly is ideal, especially for growing or venture-backed companies. Weekly reviews may be helpful during tight periods.

Can cash flow analysis help with fundraising?

Absolutely. Investors want to see how you manage burn, runway, and liquidity. A strong cash position signals financial discipline.

Take control of your cash flow with Rho

Mastering cash flow analysis empowers you to make informed decisions, anticipate challenges, and strategically allocate resources for growth. By understanding your cash inflows and outflows, you position your business for sustained success.​

Rho's integrated financial platform simplifies this process by offering:​

• Real-time cash flow tracking: Stay updated with your financial status at any moment.​
• Automated forecasting tools: Predict future cash positions with ease.​
• Centralized financial operations: Manage banking, payments, and treasury in one place.​
• Customizable dashboards: Visualize financial data tailored to your business needs.​

By leveraging Rho, you can transform your financial management from reactive to proactive, ensuring you're always prepared for what's next.​ 

Explore Rho's cash management solutions and elevate your financial strategy today.