Cash is the lifeblood of every business.
Maintaining strong liquidity is essential for meeting debt obligations, attracting investors, and capitalizing on investment opportunities.
Conversely, poor cash flow management can lead to business failure.
A cash flow analysis, when done effectively, helps identify potential issues such as cash shortages, excess cash, and liquidity gaps.
In this blog, we explore:
- The meaning and components of cash flow analysis
- How to analyze cash flow with six easy steps
- Importance of cash flow analysis
- How automation improves cash flow analysis efficiency
What is Cash Flow Analysis?
Cash flow analysis involves periodically assessing a business’s cash inflows and outflows.
It examines cash flow from activities such as operations, investments, and financing. This helps businesses assess their cash position, manage working capital effectively, and make informed financial decisions.
Cash Flow Analysis Explained
Effective cash flow analysis requires you to maintain up-to-date financial records and examine all areas of the business that impact cash movement, including:
- Accounts payable
- Accounts receivable
- Inventory
- Credit
- Investments
- Taxes
- Depcreiation
To analyze cash flow, you will need the income statement and your cash flow statement, which shows cash inflows and outflows. Before you can commence cash flow analysis, it is important to understand its components.
Cash flow is often confused with profit. Knowing the difference is the key to optimizing both.
Learn more here: What is Cash Flow and How is it Different from Profit?
Factors of Cash Flow Analysis
The cash flow statement is divided into the following three sections:
1. Cash Flow From Operations
Cash flow from operating activities includes the cash a business generates from its core operations, excluding long-term investments.
The important components of cash flow from operations include:
- Net Income: The starting point for net cash flow computing.
- Non-cash items: Depreciation, amortization, and stock-based compensation.
- Changes in Working Capital: The difference in working capital (assets and liabilities) across a given period.
2. Cash Flow From Investing
The cash flow from investing activities looks at long-term uses of cash.
This may include:
- Sale or purchase of a fixed asset, like property or equipment.
- Sale of a division or a cash-out as a result of a merger.
- Purchase or sale of securities
3. Cash Flow From Financing
Financing activities include:
- Payment of dividends
- Cash received from a loan
- Repurchase or sale of stocks and bonds
- Cash used for repayment of a long-term debt
Investors who prefer dividend-paying businesses will be hyper-focused on this section since it shows cash dividends paid.
How to (Easily) Analyze Cash Flow
While a cash flow analysis can involve multiple metrics, some key indicators serve as a good starting point for assessing a company’s cash flow quality.
Operating Cash Flow (OCF) / Net Sales
This ratio is expressed as a percentage of a company’s net operating cash flow to its revenue (from the income statement), or net sales. It will tell you how many dollars of cash are generated for every dollar of sales.
Formula: OCF / Net sales
The higher the percentage, the better. Monitoring how cash flow increases as sales rise will help detect significant deviations from the average cash flow/sales relationship and how the business compares with its peers.
Free Cash Flow (FCF)
Free cash flow is the cash remaining after capital expenditures are covered. FCF is a measure of how efficiently a business can produce cash, which in turn, can indicate its financial performance.
Investors and lenders use free cash flow to assess whether a company has sufficient cash (after capital expenditures and operating expenses) to pay investors through share buybacks and dividends.
To calculate FCF, use this formula:
Free Cash Flow = Operating Cash Flow − Capital Expenditures
Comprehensive Cash Flow Coverage Ratio (CFCR)
Cash flow coverage ratio is a metric that shows a business’s operating cash flow relative to its total debt.
To calculate CFCR, use the formula below:
Cash Flow Coverage Ratio = Operating cash flow / Total debt
Higher CFCR shows low credit risk as the operating cash flow is more than the total debt. Lower CFCR indicates a higher risk of default, as debt exceeds operating cash flow.
Master the art and science behind accurate cash flow forecasting in our blog:
A Comprehensive Guide to Cash Flow Forecasting for Today’s Finance Leaders
6 Steps in Cash Flow Analysis
Here are the easy steps to follow to perform a cash flow analysis:
Step 1: Prepare the Cash Flow Statement
The cash flow statement is the foundation for cash flow analysis, as it shows how cash flows in and out of the business through operating, investing, and financing activities.
Businesses can prepare the cash flow statement using two methods: the direct method, which reports actual cash receipts and payments, and the indirect method, which adjusts net income for non-cash items and working capital changes.
To generate a cash flow statement, follow these steps:
a) Review Cash Flow from Operating Activities
Operating cash flow is the amount of cash generated from core business operations after deducting expenses.
The accounts payable team records the cash flow from operating activities, such as:
- Cash received through sales of goods and services
- Purchase of supplies or inventory
- Salaries and cash bonuses paid to employees
- Payments made to suppliers or contractors
- Rent or lease payments
- Utility bills
- Interest paid on loans
- Income tax paid or tax refunds
- Non-cash items (depreciation of assets, amortization, deferred taxes, unrealized gains or losses, and so on)
In the accrual accounting method, finance professionals also record changes in:
- Current assets: accounts receivable, inventory, accrued revenue, and prepaid expenses
- Current liabilities: accounts payable, tax liabilities, accrued expenses, and deferred revenue
After recording all the above details, the next step is to calculate the net cash flow from operations.
While each company uses a formula based on its requirements, the following is one of the formulas to calculate cash flow from operations:
Cash Flow from Operating Activities = Funds from Operations + Changes in Working Capital
Here, Funds from Operations = (Net Income + Depreciation, Depletion, & Amortization + Deferred Taxes and Investment Tax Credit + Other Funds)
b) Examine Cash Flow from Investing Activities
Next, analyze cash flow from investment activities. Cash flow from investing activities reflects the cash used for or generated from long-term investments in assets and businesses.
These activities typically involve the purchase or sale of property, equipment, subsidiaries, or financial securities. The table below lists common investing activities and whether each results in a cash inflow or outflow.
| Investment activity | Cash flow |
|---|---|
| Purchase of property, plant, and equipment (PP&E), also known as capital expenditures (CapEx). | Outflow |
| Sale of PP&E and other assets | Inflow |
| Sale of a business subsidiary | Inflow |
| Acquisitions of other businesses or companies | Outflow |
| Purchases of securities (stocks and bonds) | Outflow |
| Sale of securities | Inflow |
| Collection of loans | Inflow |
To calculate the net cash from investing activities, subtract the outflow from the inflow.
For example, Amazon’s 2024 financial statements reflect net cash from investing activities.
| Investing Activity | 2023 | 2024 |
|---|---|---|
| Purchases of property and equipment (CapEx) | (54,733) | (69,753) |
| Sales revenue from property and equipment | 4,513 | 4,794 |
| Acquisitions, net of cash acquired, non-marketable investments, and other | (6,289) | (4,928) |
| Sales and maturities of marketable securities | 9,742 | 14,294 |
| Purchases of marketable securities | (1,286) | (13,907) |
| Net cash used in investing activities | (48,053) | (69,500) |
As you can see, Amazon had a negative net cash flow of $69,500 million from investing activities in 2024, indicating that the company spent more cash on investments than it received from the sale of assets.
While a positive cash flow from investing activities is desirable, a negative cash flow due to high CapEx can signal that the company is investing in expansion.
However, excessive spending and frequent asset sales can indicate financial distress when operating cash flow is weak.
c. Evaluate Cash Flow from Financing Activities (CFF)
This section of the financial statement shows how the business raises capital and repays its obligations.
It includes activities such as:
- Proceeds from short-term or long-term debt
- Repayments of long-term debt, leases, and other financing obligations
- Sale or issuance of bonds and stocks
- Share buyback
- Dividend payments
- Tax paid on share-based compensation
The following table shows Amazon’s net cash from financing activities in 2023 and 2024.
| Financing Activity | 2023 | 2024 |
|---|---|---|
| Proceeds from long-term debt and other | 8,360 | 13,385 |
| Repayments of long-term debt and other | (8,122) | (9,821) |
| Principal repayments of finance leases | (10,072) | (10,716) |
| Principal repayments of financing obligations | (1,378) | (1,620) |
| Payments for tax withheld on share-based compensation | (6,392) | (7,019) |
| Net cash used in financing activities | (17,604) | (15,791) |
While Amazon had a net cash outflow from financing activities in both years, the outflow stemmed from debt, lease, and tax payments related to stock compensation.
A negative CFF indicates a commitment to debt repayment and dividends. However, it can also signal liquidity concerns.
A positive CFF can indicate growth, as more cash was raised than paid out. Conversely, it can also show that the company is dependent on external financing for survival.
Step 2: Calculate Operating Cash Flow/Net Sales
The ratio of operating cash flow to net sales (or revenue) indicates the amount of cash in dollars generated per dollar of sales.
While there is no exact ratio to aim for, the higher it is, the better.
Tracking trends in this ratio and comparing them with the company’s historical average and the industry average helps identify significant deviations in cash flow performance.
Step 3: Calculate Net Change in Cash
Add the cash flows from operating, investing, and financing activities to calculate the net change in cash flow. You will also need the opening cash balance for the year.
For instance, a business $10,746 as its opening balance.
| Cash Flow Category | Amount |
|---|---|
| Operating Activities | |
| Net income and non-cash adjustments | 47,188 |
| Changes in working capital | 6,478 |
| Cash generated by operating activities | 53,666 |
| Investing Activities | |
| Purchases of securities | (148,489) |
| Sale of securities | 124,447 |
| Capital expenditures | (9,572) |
| Other investing activities | (160) |
| Cash used in investing activities | (33,774) |
| Financing Activities | |
| Dividends paid | (10,564) |
| Share repurchases | (22,860) |
| Proceeds from long-term debt | 16,896 |
| Other financing activities | 149 |
| Cash used in financing activities | (16,379) |
| Net Increase in Cash | 3,513 |
| Cash at the beginning of the year | 10,746 |
| Cash at the end of the year | 14,259 |
In the above statement of cash flows, the negative cash flow from investing and financing activities is subtracted from the positive cash flow from operating activities to compute the change in cash.
So, the change in cash = $3,513 billion.
When added to the opening cash balance of $10,746 billion, the final cash balance is $14,259 billion.
Step 4: Calculate Free Cash Flow (FCF)
To calculate FCF, use this formula:
Free Cash Flow = Operating Cash Flow − Capital Expenditures
Taking the example of Amazon’s financial statement,
Net cash from operating activities: $112,706 million
CapEx: $69,753 million
Free Cash Flow = $112, 706 － $69, 753 = $ 42,953 million
Positive free cash flow indicates that a company generates sufficient cash to repay debt, reinvest in the business, or distribute dividends, which strengthens investor confidence.
Step 5: Compare Cash Flow Trends Over Time
Finally, analyze cash flow over multiple accounting periods.
Look for patterns such as:
- Increasing operating cash flow as revenue grows
- Stable or improving free cash flow over a period of time
- Temporary negative cash flow caused by strategic investments
Trend analysis helps identify whether the business is strengthening its financial position or facing liquidity challenges.
The chart below compares Amazon’s cash flow trends from 2022 to 2024.
We can see a clear trend of growth, increased capital investment, and a commitment to debt repayment.
- Financing Cash Flow: From a net inflow of $9.7 billion in 2022 the change to net outflows in 2023 and 202 shows that the company leveraged operating cash flow to repay debt.
- Operating Cash Flow: Cash flow from operations doubled from $46.8 billion in 2022 to $115.9 billion in 2024. This signifies growth and profitability.
- Cash flow from Investing Activities: In 2024, outflows totaled $94.3 billion, driven by technology investments.
Step 6: Compute the Cash Flow Coverage Ratio (CFCR)
To calculate CFCR, use the formula below:
Cash Flow Coverage Ratio = Operating cash flow / Total debt
Bring Cash Flow Analysis Into Real-Time Operations
Cash flow analysis is only as useful as the data behind it. Treasury teams use real-time cash visibility and automated forecasting to keep decisions up to date as cash flows.
Example of Cash Flow Analysis
Below is an example of a cash flow analysis showing how a small business tracks its cash inflows and outflows.
A bakery has an opening cash balance of $5,000 at the beginning of 2025. It generates $120,000 by the end of the year.
The tables below show how the net change in cash flow and the cash balance at the end of 2025 are calculated.
| Category | Cash In | Cash Out | Net Cash Flow |
|---|---|---|---|
| Operating Activities | |||
| Sales of bakery products | 120,000 | ||
| Payments to suppliers (flour, sugar, ingredients) | 45,000 | ||
| Employee salaries | 30,000 | ||
| Rent and utilities | 15,000 | ||
| Other operating expenses | 10,000 | ||
| Net Cash from Operating Activities | 20,000 | ||
| Investing Activities | |||
| Purchase of a new oven | 8,000 | ||
| Sale of old equipment | 2,000 | ||
| Net Cash from Investing Activities | −6,000 | ||
| Financing Activities | |||
| Bank loan received | 10,000 | ||
| Loan repayment | 7,000 | ||
| Net Cash from Financing Activities | 3,000 | ||
| Beginning Cash Balance | 5000 | ||
| Net Increase in Cash | 17000 (20000 -6000 + 3000) | ||
| Ending cash and cash equivalents | 22000 (17000 + 5000) |
While the cash flow statement is vital for cash flow analysis, it is important to evaluate the balance sheet and the income statement as well to get a holistic picture of the business’s financial health.
Importance of Cash Flow Analysis
As a crucial component of financial management, cash flow analysis helps businesses understand how cash is moving in and out of the company.
Cash flow analysis helps prevent cash flow issues, which are the #1 cause of business failure. For example, poor cash flow management was one of the main reasons behind Toys R Us, a toy brand, declaring bankruptcy in 2017.
With visibility into cash flow, companies can make informed decisions on paying debt, investing in growth, and boosting financial health.
While manual methods of cash flow analysis are time-consuming and error-prone, a template can help speed up the process.
Use Automation to Optimize Treasury Management
Cash and liquidity management is the top priority for treasurers and CFOs, according to a 2025 survey by PwC.
However, with 38% of mid-cap and 52% of large-cap companies manually collecting and analyzing financial data, achieving real-time cash visibility and accurate forecasting remains a significant challenge.
With built-in AI, ML, and predictive analytics capabilities, treasury automation not only improves the efficiency of financial analysis but also delivers valuable business intelligence.
These are some of the top benefits of automation in treasury management.
Faster Access to Real-Time Data
Automated treasury systems consolidate financial, operational, and external data, enabling finance teams to gain real-time cash visibility through a centralized dashboard.
AI and ML-Driven Business Intelligence
According to Hackett Group’s recent survey, $1.7 trillion in excess working capital remains trapped.
Automation enriched by AI-driven insights flags surplus liquidity and high-yield opportunities to optimize cash flow.
For instance, Tipalti’s treasury management systems use AI to detect financial risks and provide potential solutions to mitigate them.
Automation helps unlock investment opportunities and mitigate risks
Streamlined Categorization of Cash Flow Data
One of the key challenges in cash flow analysis is correctly classifying transactions into operating, investing, and financing activities, which is vital for gaining an accurate view of a company’s cash flow.
Tipalti’s AI-enabled treasury management system structures and categorizes each transaction to promote accuracy of cash flow analysis.
Improved Forecasting and Scenario Planning
Automation with predictive analytics enables treasury teams to run accurate cash flow forecasts and evaluate financial scenarios, helping them prepare for liquidity needs, market volatility, and operational changes.
Tipalti’s integration with Statement enables pulling in live data from ERPs and transactions to provide unlimited cash-flow projections, eliminating manual effort.
Root-Cause Analytics
Interactive root-cause analysis tools help teams quickly understand what business activities or factors are influencing cash flow, working capital, or financial performance.
Automate Cash Flow Analysis to Gain a Competitive Edge
A cash flow analysis helps business owners understand how money flows through the organization. It is the basis for monitoring liquidity, managing working capital, and making informed financial decisions to optimize the bottom line.
Treasury teams that outperform their peers embed automation, finance analytics, and accountability in their cash flow management processes.
By enabling real-time visibility, control, and optimization of cash — the drivers of competitive edge — automated cash flow analysis allows finance leaders to move beyond manual analysis and focus on strategic decision-making.
Enhance the efficiency and accuracy of cash flow analysis with AI-enabled automation.
Get started with Tipalti’s treasury management software
Cash Flow Analysis FAQs
1) How do you perform a cash flow analysis?
The simplest way to perform cash flow analysis is to subtract expenses (cash outflows) from inflows in a specific period. For a step-by-step breakdown, refer to the 6 Steps in Cash Flow Analysis section above.
2) When should you do a cash flow analysis?
Cash flow analysis should be done regularly, either on a monthly or a quarterly basis. You should also do a cash flow analysis when making major financial decisions, planning expansion, or facing cash shortages.
3) What’s the difference between cash flow analysis and forecasting?
Cash flow analysis examines past cash inflows and outflows, while forecasting predicts future cash flows.
4) What’s the difference between cash flow and profit?
Cash flow is the net cash resulting from cash inflows and outflows. Profit is the revenue minus the expenses and is the ‘bottom line’ reflected in the income statement.
