How to Do a Cash Flow Analysis

Cash flow analysis can be defined as a study to determine an individual's financial health. By looking at the cash inflows and cash outflows, he will know whether the position of his financial health is in good condition. The purpose of cash flow analysis is to maintain a healthy inflows and outflows of cash to make sure an individual is able to cover his living expenses. It provides a basis for cash flow management.

Here are the steps on how to do a cash flow analysis:

• Prepare a cash flow statement. Determine the amount of income, earned or unearned, in the cash inflows columns. The items which can be included in this category are your salary, bonuses, wages, rentals, annuities, dividends and interests.

• Calculate the amount of expenses that will flow out in the outflows columns. There are two types of outflows: fixed and variables. Fixed outflows includes, but not limited to expenses like premium of insurance, payment to mortgage and repayment of car loan. Variable outflows may include groceries, utilities, food, parents' allowance and income tax.

• Then net cash flow is derived by subtracting the total fixed and variable outflows from the inflows. The results of the net cash flow could be positive if the cash inflows are greater than the cash outflows. Otherwise, it will be a deficit net cash flow if the cash outflows exceed the cash inflows.

• To be able to always in the good financial health, we would want the net cash flow to be always positive or a surplus. The greater the surplus we would have more resource to cater for the life goals in our life planning.

• Net cash flow may turn negative for any particular month. In that case we may need assistance from our credit card, family or friends. Try to improve on the situation to get back to a surplus net cash flow in the following month, so we can repay the loan.

Cash flow analysis is the very first part in developing individual's goals. It can detect any inefficiency and ineffectiveness in finance resources utilization. Effort should be made to improve if the outcome of cash flow analysis is not up to our expectation.

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