Why is it important to do a monthly cash flow analysis?

Asked on 1/20/2009 by
Answered by Charles M Cooper

In short, because the cash-flow analysis gives you a picture of what is actually happening with your business' finances. It may agree with your income projections, or it may radically disagree. You need to remember that income statement projections are little more than educated guesses. It is by studying the cash flow of your business from month to month that you will see how things really are. By doing this analysis you will be able to:

• Know if your income will be sufficient to pay operating expenses
• Predict cash shortfalls
• Know if you need for more capital or increased cash reserves
• Know when you could reduce debt and/or make major purchases or expand operations.
• Time cash needs and quantify the amount needed.

Remember: Having sufficient cash is critical for paying expenses and expansion and a monthly cash-flow analysis the right tool for getting a handle on this aspect of your business.

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