Cash flow analysis for a small business: six checks, with a worked example

Short answer: a cash flow analysis explains why the bank balance moved and whether that is a problem. Take a period (the last three, six or twelve months) and work through six checks: (1) split the change in the bank into trading, assets and financing; (2) compare the cash from trading with the net profit; (3) find what soaked up the difference: customers paying slower, more stock, less credit from suppliers, tax; (4) compare what the owners took out, plus loan repayments, with the profit after tax; (5) list the one-off and dated payments; (6) find the lowest point the bank reached and how many weeks of costs it covered. The result is a short list of causes with amounts, for example “$38,000 of it is customers paying slower”, and that tells you what to fix. A business can be profitable and still fail this analysis, which is usually the reason people do one.

The six checks

Check	The question it answers	Where the numbers come from in Xero
1. Where the cash went	Did trading, buying assets, or loans and drawings move the balance?	Statement of Cash Flows, or Bank Summary for the period
2. Cash vs profit	Did the profit turn into cash?	Net profit (Profit and Loss) against cash from operating activities
3. Working capital	Is cash stuck in customers, stock or early supplier payments?	Balance Sheet at both dates: accounts receivable, inventory, accounts payable
4. Owners and lenders	Are drawings, dividends and repayments more than the business earns?	Drawings or shareholder current account, loan accounts, Balance Sheet
5. Tax and one-offs	Which dated payments hit the period, and which are coming?	GST/BAS/VAT returns, income tax, annual bills, asset purchases
6. The low point	How close did the bank get to zero, and how often?	Bank account transactions, or a daily balance from the bank feed

Checks 1 and 2 tell you whether you have a cash problem or a profit problem. Checks 3 to 5 tell you what caused it. Check 6 tells you how urgent it is. For check 2 as a single percentage you can track each year, see the cash conversion ratio.

A worked example: a Christchurch signage company’s six months

A signage and print company in Christchurch is GST-registered, with a 31 March balance date. On 1 April it had $64,000 in the bank. On 30 September it had $21,000, down $43,000. The profit and loss for the same six months shows sales of $300,000 (excluding GST) and a net profit of $48,000. The owner’s question: “We made $48,000, so where did $43,000 go?”

Check 1: where the cash went. Splitting the bank movement three ways:

	Six months to 30 September
Cash from trading (operating activities)	−$3,000
New wide-format printer (investing)	−$26,000
Asset finance received for the printer	+$22,000
Owner’s drawings	−$30,000
Van loan repayments	−$6,000
Change in the bank	−$43,000

The printer cost the bank only $4,000 net, because it was mostly financed. The striking line is trading: six months of profitable work brought in −$3,000.

Check 2: cash vs profit. Net profit was $48,000; cash from trading was −$3,000. That is a $51,000 gap to explain. A healthy business usually turns most of its profit into cash over a year, roughly 80% to 100% or more once depreciation is added back. This one turned none of it into cash.

Check 3: working capital. Comparing the balance sheet on 31 March and 30 September:

What moved	31 March	30 September	Effect on cash
Accounts receivable (owed by customers, incl. GST)	$42,000	$80,000	−$38,000
Inventory (vinyl, substrates, inks)	$18,000	$27,000	−$9,000
Accounts payable (owed to suppliers)	$21,000	$25,000	+$4,000

Sales including GST averaged about $1,885 a day over the six months ($345,000 ÷ 183 days). At that rate, receivables went from about 22 days of sales to 42 days. Two large council and retail fit-out jobs were invoiced in August on 30-day terms and had not been paid. The debtor days calculator does this sum for any period.

The rest of the $51,000 gap: provisional tax of $14,000 (two $7,000 instalments, on 7 May and 28 August), which is not in a profit-before-tax figure, offset by $6,000 of depreciation that reduced profit without using cash:

$48,000 profit + $6,000 depreciation − $38,000 debtors − $9,000 stock + $4,000 creditors − $14,000 tax = −$3,000

Check 4: owners and lenders. Drawings of $30,000 plus van repayments of $6,000 make $36,000. Profit after about 28% tax is roughly $34,560. So the owner took out about what the business earned after tax. That would be sustainable if the profit had arrived as cash, but this period none of it did, so all $36,000 came out of the opening balance. If a lender is involved, cash flow cover turns this check into the ratio banks test: cash available after tax and drawings ÷ a year of loan repayments.

Check 5: tax and one-offs. The printer and the two provisional tax instalments were the dated payments. Looking ahead, the GST return for September and October is due on 28 November (what each box on the Xero GST return means) and includes the GST on the unpaid August invoices, so it falls due whether or not the customers have paid. The next provisional tax instalment is due on 15 January.

Check 6: the low point. The bank’s lowest balance was $8,500 on 28 August, the day of the second tax instalment. Wages, rent and supplier payments run at about $45,000 a month, so $8,500 covered about four working days of costs. The cash runway calculator turns a balance and monthly costs into weeks.

The conclusion. This is a timing problem, not a profit problem: margins are fine and the business made $48,000. The cash went into customers paying slower ($38,000), extra stock ($9,000), tax ($14,000) and drawings that assumed the profit was in the bank. The fixes, in order of size:

1. Collect the two overdue fit-out invoices. Bringing receivables back to 25 days ($47,000) would release about $33,000, taking the balance from $21,000 to about $54,000.
2. Take deposits or progress payments on large jobs, so the next fit-out does not tie up a month of materials and labour before it is paid.
3. Set tax aside each month into a separate account, so instalments stop setting the low point.
4. Hold drawings at a level the cash supports until receivables are back to normal, then return to the usual amount.
5. Run down the extra $9,000 of stock by buying to order for a couple of months.

Positive cash flow, negative cash flow, and what is normal

Positive cash flow means more cash came in than went out over the period, so the bank balance rose. One negative month is normal: a quarterly GST, BAS or VAT payment, an annual insurance bill or a big stock order can make any month negative. What matters is:

• cash from trading over a full year is positive and close to net profit;
• negative months have a known cause (an asset, tax, a planned stock build), not a slow drift;
• the low point stays above a buffer you are comfortable with, often one month of fixed costs (see how many months of cash a business should have).

A business can have negative net cash flow and be healthy (it paid for a new van from savings), and positive net cash flow and be in trouble (it borrowed to cover losses). That is why check 1 separates trading from assets and financing.

Doing the analysis in Xero

1. Statement of Cash Flows (Accounting > Reports) for the period gives check 1. Xero uses the direct method, so each line is money that actually moved. How to run and read it.
2. Profit and Loss for the same dates gives the net profit for check 2. Run it by month to see whether the profit was steady.
3. Balance Sheet with two date columns (the start and end of the period) gives receivables, inventory, payables, loans and drawings for checks 3 and 4. The cash flow from operations guide shows the formula line by line.
4. Aged Receivables Summary shows which customers make up the increase in receivables. See who owes me money in Xero.
5. Bank account transactions with the running balance show the low point for check 6.

Do the analysis on cash basis figures only if your profit and loss is also on cash basis; otherwise check 3 will not reconcile. The cash vs accrual guide explains the difference. If you want to see what the inflows and outflows usually are, the cash inflow and outflow examples list them by type, and if the analysis shows a gap coming, a cash flow budget plans the months ahead.

Common questions

What is a cash flow analysis? A review of the money that came into and went out of the business over a period, to explain why the bank balance changed and whether the cause is trading, assets, borrowing, drawings or timing. It ends in a short list of causes with amounts.

How do you do a cash flow analysis for a small business? Take a period, split the change in the bank into trading, assets and financing, compare cash from trading with net profit, explain the difference using the change in receivables, stock, payables and tax, compare drawings and loan repayments with profit after tax, and find the lowest balance the bank reached.

How often should a small business analyse its cash flow? A full analysis each quarter, and a quick look at the bank balance, receivables and bills due every week. Most problems in the worked example were visible weeks before the low point.

What is the difference between a cash flow statement and a cash flow analysis? The cash flow statement is the report: cash in and out, grouped into operating, investing and financing. The analysis is what you do with it: comparing it with profit and the balance sheet to find why cash moved and what to change.

Is negative cash flow always bad? No. A month or quarter can be negative because of an asset purchase, a tax payment or planned stock. It is a warning when cash from trading is negative for several months while the business reports a profit, or when the low point keeps getting lower.

What ratio shows whether profit turns into cash? Cash from operating activities divided by net profit. Over a year, close to 1 or above is normal for a steady business. Well below 1 means cash is being tied up in customers, stock or tax, which checks 3 and 5 will show.

Get the analysis every Monday instead

Most of this analysis is the same few comparisons each week: cash against last month, profit against cash, who owes you and what is overdue, bills due soon. ReportPilot reads your Xero figures and sends those comparisons as a short plain-English email every Monday, and its dashboard shows 24 months of sales, profit, cash and money owed to you by month, so a drift like the signage company’s receivables shows up in the first weeks rather than at the low point. It asks Xero for read-only access, so it can read your accounts but never change them, and there is a 14-day free trial with no card. If the bank is low while the profit and loss shows a profit, the free profit but no cash tool runs checks 1 to 5 on numbers you type in.