Learn how to do a fast, simple cash flow analysis calculation.
Watch this short video to learn how to do a fast, simple cash flow analysis calculation so you can maintain and even increase your business profits.
Learn to use this simple cash flow analysis formula on how to track business cost increases and then take quick action to increase or maintain your business profits.
Use this formula on Cost of Goods Sold and on expense items from your Profit and Loss Statement.
Cost of Goods Sold categories in your accounting are for things your business buys specifically to deliver your type of products and services, as opposed to regular expenses, like telephone service, utilities, and office supplies that every business owner pays for regardless of the type of industry their business is in.
Here’s an example for a veterinarian. A veterinarian’s Cost of Goods Sold categories typically include such things as:
Biomedical Waste Removal
Medical Supplies – not for resale
Products for Resale
Vet Professional Relief Labor
These items would not be purchased by a business owner who runs a restaurant or a carpet cleaning company.
Now, let’s go over the simple formula to get the percentage your Cost of Goods have been running to get a benchmark number to evaluate future costs against for our cash flow analysis demonstration.
We use a Profit and Loss statement from the previous year to get the total Income and total Cost Of Goods Sold. Now, using a calculator, we use this formula – Total Cost of Goods Sold divided by the Total Income, and the result equals a percentage. That percentage is the average and becomes the benchmark for future profitability. In this video, the example we used yielded our benchmark percentage of 44.22 percent.
Now at the end of each future quarter, we use a Quarterly P&L and then we do the same cash flow analysis calculation to see if our costs are inside an acceptable range when compared to the benchmark, or if we are seeing our costs creeping higher.
Looking at the first quarter of the next year, you see that in the cash flow analysis calculation shows the Cost of Goods Sold was right around the benchmark at 44.31 percent. So there is no cause for concern.
A cash flow analysis of second quarter shows the cost of goods sold percentage is creeping higher. If the business owner does not immediately know why that would be happeneing, then the first thing that should be checked is if any of the suppliers raised their prices without notifying the business owner. If that turns out to be what happened, then the business owner needs to make the decision whether or not to pass that increase on to their customers on that item to maintain profitability.
Now we come to the third quarter calculation. If the business owner found suppliers’ prices did increase, and they took action and raised their prices to compensate for that to stay profitable, and their costs still continue to creep up in relation to the benchmark, then the business owner needs to look into two additional areas of potential concern – waste and theft.
It is fairly common to find both waste and theft of supplies in a business. Even though each one may be a small amount per incident, over the long haul it can erode profitability and cause a business to become cash poor, and begin to use credit debt to cover losses, making it more difficult to recover profitability.
You can use this same cash flow analysis formula to calculate your company’s expense items too, so you are aware of cost creep in areas like postage or regular office supplies.
I highly recommend that, as a business owner, you use this cash flow analysis calculation exercise on a consistent basis to keep costs under control and maintain or increase your profitability.
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How To Do A Simple Cash Flow Analysis To Guarantee Your Business Makes A Good Profit