Monthly cash flow analysis: How often should you check it and what to watch for

Published Monday 22 September 2025

Table of contents

• What is cash flow analysis?
• How often should you analyze your small business cash flow
• How to analyze your small business cash flow
• Use ratio analysis for more insights into your cash flow
• Common mistakes to avoid with cash flow analysis
• Stay on top of your cash flow analysis with Xero
• FAQs on cash flow analysis

Key takeaways

• Cash flow analysis looks at how money moves in and out of your business, so that you can assess trends and make smart decisions.
• You should analyze your cash flow as often as you can, so you can make timely adjustments for upcoming cash flow crunches – or take advantage of cash flow increases.
• Cash flow reports show how money moves in and out of your business. These reports include your operating, investment, and financing activities.
• Cash flow analysis helps you spot trends, so you can make more informed business decisions.

What is cash flow analysis?

Cash flow analysis helps you understand how money moves in and out of your business, so that you can judge your business’s viability, recognize trends, and make informed decisions.

For example, cash flow analysis can help you see if the business generates enough cash to cover upcoming expenses, and can guide big decisions about loans, investments, and operating activities.

How often should you analyze your small business cash flow?

You should do analysis as often as necessary for your business.. Regular analysis helps make sure you can cover upcoming expenses – and know when to change course when you see problems.

You should also use cash flow analysis anytime you need to make a big decision about your business, like hiring more staff, investing in new equipment, or restructuring your loans. Most financial decisions relate to cash flow, and knowing how to analyze your cash flow statement is critical if you want to manage your finances well.

The Small Business Administration has resources to help with small business finance management.

How to analyze your small business cash flow

A good starting point for cash flow analysis is a cash flow report. This report shows how money moves in and out of your business over a set period—such as a week, month, quarter, or year.

Most cash flow reports are divided into three categories: operating activities, investing activities, and financing activities. The details under each section will vary depending on your business.

Here’s a simple example of a cash flow statement, followed by tips on how to analyze each part:

Operating activities:

• Receipts from customers: $500,000
• Payments to suppliers and employees: ($400,000)
• Cash receipts from other activities: $2,000
• Net cash flow from operating activities: $102,000

Investing activities:

• Proceeds from sale of equipment: $20,000
• Net cash flow from investing activities: $20,000

Financing activities

• Loan payments: ($15,000)
• Other cash items from financing activities: ($30,000)
• Net cash flow from financing activities: ($45,000)

Net cash flows

• Cash and cash equivalents at beginning of period: $0
• Net cash flows: $77,000
• Cash and cash equivalents at end of period: $77,000
• Net change in cash for period: $77,000

1. Review your operating cash flow

Examine the cash generated from sales and other activities, minus operating expenses such as rent, utilities, and wages. Compare this period’s numbers to previous periods to spot trends and identify areas for improvement.

Ask: What drove high revenue periods? Why were expenses higher in some months? How can you optimize cash flow from daily operations?

2. Assess investing and financing activities

Look at cash spent or gained from equipment purchases, loan payments, and other investments. Understanding these sections together helps you see how asset acquisitions and financing decisions affect cash on hand.

Example: $20,000 from equipment sales vs. $45,000 spent on loans shows whether operating cash flow can cover obligations or if surplus cash could be reinvested.

3. Calculate and act on net cash flow

Determine your net cash flow (free cash flow) by subtracting outflows from inflows. Positive net cash flow provides options to reinvest, pay yourself, or save. Negative net cash flow signals the need to limit spending or increase revenue.

Regularly reviewing net cash alongside forecasts ensures your business remains financially healthy and prepared for seasonal fluctuations or growth opportunities.

Use ratio analysis for more insights into your cash flow

To improve your cash flow management further, it’s useful to use cash flow ratios. Ratios show a relationship between two different numbers – for example, cash flow and short-term liabilities or revenue and profit. They can help you make decisions – but they're complicated, and to understand how to use them, you may want to consult with an accountant.

Here are two ratios that are particularly useful for small businesses.

The FDIC has learning modules that can help you understand more about how cash flow and these ratios affect your business.

Operating cash flow ratio

This ratio shows you how your operational cash flow compares with your current liabilities which are debts due over the next year. It shows you if you can afford to pay your debts, but it also signals when you're leaving too much cash in the business that could be used for other purposes.

To get this ratio, you need a cash flow report and a balance sheet from the end date of your cash flow summary. For instance, if you run a cash flow report for the first quarter of the current year, you should run a balance sheet dated March 31 (the final day of the quarter). If your cash flow summary shows the current month to date, use a balance sheet dated today.

Here’s the formula:

Operating cash flow ratio = net cash flow from operations / current liabilities

• If your operating cash flow ratio is less than one, your short-term debts exceed your cash flow.
• But too high a number can indicate you have excess cash you could invest in the business to grow your profits.

Operating cash flow margin

The operating cash flow margin shows you which portion of your revenue is available for financing or investing, after you've covered your operating expenses. This ratio can help you make predictions about how much cash you're going to have left over after you pay your operating expenses.

Operating cash flow margin = net operational cash flow / revenue

You can work with the ratio or turn it into a percentage by multiplying the answer by 100. For example, if a company has $102,000 in operational cash flow and $500,000 in revenue, this means that 20.4% of their revenue is cash available for investing and financing activities.

Negative operational cash flow automatically turns the ratio into a negative number. Say that you get a ratio of -10%. This means your operational expenses exceed your revenue by 10% – and that you should probably find ways to limit these expenses or raise your revenue.

Common mistakes to avoid with cash flow analysis

If you really want to improve your cash flow management, you need to avoid these common mistakes.

Look beyond a single time period

The most effective analysis compares cash flow over two or more periods of time.

Analyze the full report

Although you sometimes need to focus on operational or investing/financial cash flow, it's important to take in all of the elements of the cash flow summary.

Remember cash equivalents

Your report shows cash (such as money in your bank account) and cash equivalents (like stocks or bonds). When assessing your available cash, remember that some of those funds might be cash equivalents that might not be ready to liquidate.

Understand how expenses flow into the report

The way you set up your accounting software affects how the cash flow report comes out. For instance, if you have your payroll set up as a short-term liability account, it may appear in the financing section – rather than the operational expenses section – by mistake.

Stay on top of your cash flow analysis with Xero

Xero gives you everything you need to clarify and manage your cash flow, and then interpret it for better business decisions.

Xero easily generates cash flow summaries and reports. It also has built-in tools that help you compare cash-in and cash-out for different time periods, your income against your expenses, and more.

Get one month free.

FAQs on cash flow analysis

Check out these answers to some business owners' most common concerns.

How do you analyze cash flow?

Generate a cash flow summary using your accounting software. Then, look at how operations, investment, and financing activities have affected your cash flow. Perform ratio analysis if you need to and use these numbers to learn more about your business and to guide decisions.

How do you calculate annual cash flow?

Start by running a cash flow report for the year you want to look at, or generate a profit and loss report and find your net income. Then, add back in your non-cash expenses (such as depreciation) and cash received from financing or investment activities, then subtract cash used for loan payments. The result is your cash flow for the year.

What are the three categories of cash flow?

There are three categories of cash flow: operations, investments, and financing. Each of these categories has subsections, such as operating and non-operating revenue.

How does cash flow differ from profit?

Cash flow only looks at the cash coming in and going out of your business.

Profit shows you how much the business earns after taking into account all of its revenue, expenses, and depreciation. Profit accounts for some elements that don't affect cash flow, but doesn't account for certain transactions that affect cash flow – for instance, profit includes depreciation (which does not affect cash flow) but does not include loan payments (which do affect cash flow).

It's easy to get these concepts confused – if you have a lot of cash in the bank at the end of the year, it may seem like you have a lot of profit. But that's not the case. You could have a lot of cash flow and negative profit, or the reverse – high profits and strained cash flow.