When you’re seeking funding for your business, one of the most critical factors lenders consider is your cash flow. Cash flow is essentially the heartbeat of your business—it reflects how money moves in and out, influencing your ability to cover expenses, reinvest in growth, and, most importantly, repay loans. At Clear Skies Capital, we streamline this process by focusing on the most recent four months of your bank statements. This article will walk you through our cash flow analysis process, why it matters, and how it impacts your funding opportunities.
What Is Cash Flow?
Before diving into the specifics of our analysis, it’s essential to understand what cash flow is. Cash flow refers to the net amount of cash being transferred into and out of your business. Positive cash flow means that your business is bringing in more money than it’s spending, while negative cash flow indicates that your outgoings exceed your income.
Cash flow is crucial because it determines your ability to meet financial obligations—like paying your bills, purchasing inventory, and investing in new opportunities. Consistent positive cash flow is a strong indicator of a healthy business, whereas irregular or negative cash flow may signal underlying financial issues.
Why we focus on the last four months
At Clear Skies Capital, we review just the last four months of your bank statements when assessing your cash flow. Why only four months? This period is typically sufficient to provide an accurate snapshot of your business’s current financial health without overwhelming you with paperwork. Here’s why this approach works:
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- Recent Activity Reflects Current Conditions: The last four months of bank statements offer a close-up view of your recent business activity. This helps us understand how your business is performing right now, rather than relying on outdated information.
- Efficiency and Ease: By focusing on a shorter time frame, we can expedite the underwriting process. This means quicker decisions and faster access to the funds you need.
- Spotting Trends: Four months is enough time to identify trends in your cash flow, whether positive or negative. This helps us make informed decisions about your eligibility for funding.
Step 1: Analyzing Your Deposits
The first step in our cash flow analysis is examining your deposits over the last four months. Deposits represent the inflow of money into your business, primarily from sales, but they can also include loans, grants, or other sources of income. Here’s what we look for:
- Consistency: Consistent deposits indicate steady revenue, which is a positive sign of your business’s ability to generate income regularly. This consistency is crucial for demonstrating that your business can maintain operations and repay loans without disruption.
- Growth or Decline: We assess whether your deposits are increasing, decreasing, or remaining stable. A growth in deposits suggests that your business is expanding and potentially taking on more customers or clients. On the other hand, a decline may indicate challenges that could affect your financial stability.
- Seasonal Fluctuations: Some businesses experience seasonal peaks and troughs. We take this into account by looking at the pattern of your deposits. If you operate in an industry with seasonal variations, it’s important to show that you can manage these fluctuations effectively.
- Unusual Spikes or Drops: Sudden, unexplained changes in your deposits might raise red flags. We look for consistency and predictability, as these are signs of a stable business.
Example 1 – If deposits for the last four months look like this
- Month 1: $20,000
- Month 2: $22,000
- Month 3: $19,000
- Month 4: $21,000
This pattern suggests consistent revenue with minor fluctuations, which is a positive indicator for lending purposes.
Example 2 – If deposits for the last four months look like this:
- Month 1: $30,000
- Month 2: $98,000
- Month 3: $340,000
- Month 4: $52,000
This pattern suggests in-consistent revenue with major fluctuations, which is a negative indicator for lending purposes.
Step 2: Calculating Daily Ledger
Once we’ve analyzed your deposits, we move on to calculating your daily ledger. This involves examining your daily account activity to understand how much cash you have available each day and how this affects your business operations. Here’s why this matters:
- Debt Servicing: One of the most critical aspects lenders focus on is your ability to service debt. A positive daily ledger is a strong indicator that you have the financial capacity to make loan repayments comfortably without compromising your business operations. Lenders want to ensure that you can meet your financial obligations consistently. By showing a positive and stable daily ledger, you demonstrate that your business is capable of handling additional financial responsibilities and making timely debt repayments.
- Daily Ledger as a Health Indicator: The daily ledger provides insight into your business’s financial health by showing how much cash you typically have available each day. Consistent daily ledger balances are crucial for maintaining operations and managing expenses effectively.
Step 3: Assessing Account Stability
Account stability is another critical aspect of our cash flow analysis. We examine your average ledger balance over the four months to determine how steady your account balance is. Here’s what we look for:
- Average Ledger Balance: Your average ledger balance is the average amount of money in your account over the four-month period. A higher average balance is generally a good sign, indicating that you maintain a healthy buffer of cash in your account.
- Highs and Lows: We also consider the range of your account balance—the highest and lowest points over the four months. A wide range might suggest volatility, while a narrow range indicates stability.
- Consistency: Consistent account balances are a positive sign, showing that your business maintains enough cash to cover expenses regularly.
For example, if your average ledger balance over the last four months was $15,000, with a high of $18,000 and a low of $12,000, this indicates a stable account with sufficient funds to manage day-to-day operations.
For example, if your average ledger balance over the last four months was $15,000, with a high of $18,000 and a low of $12,000, this indicates a stable account with sufficient funds to manage day-to-day operations.
Step 4: Monitoring Overdrafts and NSF Checks
Overdrafts and Non-Sufficient Funds (NSF) checks are important indicators of potential cash flow challenges. Here’s why we pay close attention to these:
- Overdrafts: Frequent overdrafts can signal that your business is regularly spending more money than it has available. This is a red flag, as it suggests that you may struggle to meet financial obligations, especially during lean periods.
- NSF Checks: NSF checks occur when there isn’t enough money in your account to cover a transaction. This can damage your business’s reputation and relationships with suppliers. High numbers of NSF checks indicate poor cash flow management and can affect your ability to secure funding.
- Implications for Lending: Both overdrafts and NSF checks are indicators of financial instability. Lenders may view them as signs that your business is at risk of defaulting on a loan, making it harder to secure favorable terms.
If, for example, you had two overdrafts and three NSF checks in the last four months, this would be a cause for concern. Addressing these issues before applying for funding is crucial for improving your chances of approval.
Step 5: Understanding the Overall Financial Health
Finally, we compile all this information to assess your overall financial health. This holistic view allows us to make informed decisions about your eligibility for funding and determine the best financial solutions for your business. Here’s what we consider:
- Comprehensive Analysis: We don’t just look at one aspect of your finances; we consider everything from deposits and cash flow to account stability and overdrafts. This comprehensive analysis gives us a clear picture of your financial health.
- Tailored Funding Solutions: Based on our analysis, we can offer funding options that are specifically tailored to your business’s needs and situation. Whether you need a short-term loan to cover a cash flow gap or a long-term investment to fuel growth, we can match you with the right product.
- Mitigating Risks: Understanding your financial health also helps us identify potential risks. By addressing these risks proactively, we can help you strengthen your financial position and increase your chances of securing funding.
For instance, if our analysis shows that your cash flow is positive, but you’ve had a few recent overdrafts, we might recommend a line of credit to help smooth out cash flow fluctuations. This way, you have access to funds when you need them without risking overdrafts or NSF checks.
Conclusion: Why Cash Flow Analysis Matters
Understanding your cash flow is vital for making informed financial decisions. By reviewing just four months of bank statements, Clear Skies Capital can quickly assess your financial health and help you secure the right funding to support your business growth.
Whether you’re looking to expand, manage day-to-day operations, or invest in new opportunities, having a clear picture of your cash flow is the first step toward achieving your financial goals. If you have any questions or need help with your cash flow analysis, don’t hesitate to reach out. We’re here to help you succeed.