Specifics Of Business Cash Flow Analysis Explained

business cash flow analysisSome specifics of business cash flow analysis

There are many instances in business when two or more possible scenarios are possible and a choice needs to be made between possible scenarios. Business case analysis is undertaken to address questions such as these:

  • Is there financial justification for the proposed asset purchase?
  • If we implement the proposed initiative, what are the funding requirements from our capital budget? From our operating budget?
  • Which investment proposals is the most promising? Which is least risky?
  • Which course of action represents the better business decision?

The analysis attempts to answer such questions by predicting future business outcomes under one or more scenarios. The case includes one scenario for each possible action, decision, or investment that is being considered including a scenario for taking no action or “business as usual” that also provides a benchmark. Analysis and comparison of the scenarios will be the factors that decisions are based on.

Determining changes with business cash flow analysis

When comparing two or more scenarios it is helpful to construct an incremental cash flow statement. The incremental statement shows only what changes when a scenario is implemented compared to making no change, which is why it is central when decision makers are choosing which scenario to go with. Incremental cash flow data makes it possible to use the following investment metrics:

  • Return on Investment (ROI)
  • Payback Period
  • Internal Rate of Return

Cash flow statement structures

Business case cash flow statements have a very simple basic structure with two major sections:

  1. Cash inflows
  2. Cash outflows

There isn’t a separate section for cash flow from operations, investing or financing as with some cash flow statements.

For business case scenario cash flow statements, it is useful to have:

  • A summary line totaling benefits (cash inflows) and another totaling costs (cash outflows). In the full value statements, these lines are helpful for budgeting, planning, and revenue forecasting.
  • A summary line for net cash flow, period by period, and in total. This is the scenario’s net cash flow, for the cost and benefit items analyzed.
  • A summary line for cumulative cash flow, period by period.
  • A summary line for present values (discounted cash flow values), whose total is the net present value (NPV) of the net cash flow stream.

Use a cash flow analysis example to start writing your paper. And if you would like help with your business cash flow analysis, our company analysis service is available 24/7.

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Specifics Of Business Cash Flow Analysis Explained
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