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Conducting Cash Flow Analysis

Conducting a routine cash flow analysis is an easy way for international businesses to keep tabs on their financial health. A cash flow analysis compares the timing and amount of a company's current cash to the business's inflow and outflow of capital, which can provide insight into the company's financial future.

"Net income is an important accounting measure of profitability, but it doesn't capture the value of a company like cash flow does," says John Stermole, a teaching associate professor of economics and business at the Colorado School of Mines in Golden, Colo.

Conducting an analysis of the statement of cash flow helps predict how a business will fare in the future, thus empowering owners to follow up on good foreign investment opportunities and determine when it's appropriate to increase capital expenditures, says Chris DesBarres, co-owner of Help Unlimited Inc., a money management company in Winston-Salem, N.C. Business owners can take advantage of credit facilities from an FX service provider, which allows business owners to pay deposits to an online account and free up cash flow, says Nawaz Ali, U.K. market analyst for Western Union Business Solutions.A cash flow analysis can be conducted using the following steps.

“You need to understand what your cash flow statement is telling you about your income statement and your balance sheet.”

— Chris DesBarres, co-owner of Help Unlimited Inc.

Step 1

One way for business owners to create more accurate cash flow projections is to use a trusted online foreign exchange service that can help them create more predictability around their exchange rates. FX service providers can provide business owners with advice and guidance in setting aside funds to protect against currency exposure and create their financial forecasts for the year. "Once a customer gets a feel for currency markets and currency exchange, then he would use one of our products … to hedge against currency exposure," Ali says. By using tools such as email market-rate alerts, it's possible to minimize some of the uncertainty that can accompany foreign exchange transactions.

For example, if a U.S.-based business owner needs to submit a payment of 2 million Philippine pesos (PHP), he could sign up for email market-rate alerts via an online FX service. When the business receives an alert for a preferred exchange rate of $1 U.S. dollar (USD) = 40.740 PHP, the business owner could immediately go to his online foreign exchange account and secure the latest rate. If he is able to secure the same rate that he was alerted to, he could convert $49,092 USD into about 2 million PHP.

Step 2

Another key step to conducting cash flow analysis is to understand the relationships among different types of financial statements. "You need to understand what your cash flow statement is telling you about your income statement and your balance sheet," DesBarres says.

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To do this, determine the amount of cash on hand at the beginning of every month, quarter or year, as well as the sources of cash, such as sales and amounts receivable.

Step 3

Next, determine which business expenses the cash on hand goes toward and how much is spent, DesBarres says. Fixed expenses, like rent, and variable expenses, like taxes, should be included. "This process can be a problem compounded by sloppy recordkeeping and poor accounting practices," he says.

Step 4

Once business expenses are subtracted from the business's initial balance, DesBarres advises business owners to focus on issues of timing. "It's important to pay attention to when receivables come in and when payables go out," he says. "This will help explain what makes accounts receivable turnover higher and accounts payable turnover lower and can sharpen a business model."

Step 5

The final step is to troubleshoot any problems that become apparent, such as an issue with timeliness on the return of receivables, DesBarres says. "It's not enough to say, 'We're having cash flow issues,' once you know where the problem is coming from."

Depending on their investment strategy, small business owners should conduct a regular cash flow analysis every month, quarter or year, plus any time a new project begins to ensure the health of a business, Stermole says. That's especially important for companies that do business abroad, since fluctuating currency rates can have a significant impact on cash flow, he says.

Live Cross Rates

USD 69.3440 1.3139 0.7857 53.2670 1.0000 0.8780
CAD 52.7470 1.0000 0.5978 40.5230 0.7604 0.6680
AUD 50.4280 0.9555 0.5715 38.7410 0.7268 0.6386
EUR 78.9250 1.4956 0.8945 60.6340 1.1377 1.0000
GBP 88.1960 1.6713 1.0000 67.7560 1.2713 1.1169

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