A cash flow analysis identifies how money is flowing into and out of your organization during a specific period. This analysis details where your money is going and how much cash you have on hand, giving you a better understanding of your organization’s finances. With this information, your organization can pinpoint cash flow problems quickly—and implement changes to fix them quickly, too.

A common best practice is a monthly cash flow analysis. But you might decide to conduct these analyses more or less frequently, depending on your organization’s needs. For example, if your organization’s cash flow is more predictable, you might do them quarterly. Whereas, if your organization is in an industry with a variety of external variables that can impact cash flow, you might conduct them weekly.

Whether weekly, monthly, or quarterly, these regular analyses can help your organization avoid running short on cash. Here are some of the most common problems a cash flow analysis can uncover, along with potential solutions.

Problem #1: Your profits are high, but your cash flow is low

Potential solution: Rework your organization’s collection process
Implementing a more proactive collection process can help shore up your organization’s cash flow. One place to start is when your organization collects debts. For example, instead of waiting until the end of the month, perhaps move up the due date for payments. Ultimately, the sooner money moves from a customer’s pocket to yours, the sooner you can allot those funds to your expenses.

Reporting is another key aspect of effective collecting. Regular reporting guarantees that accounts are up-to-date and reflect your customers’ balances. Some of these processes can be done automatically with a digital service, helping your organization avoid mistaken entries. With regular reporting, your organization can produce an aging report that identifies your customers’ debts as well as the length of delinquency. It’s important to address delinquent debts quickly because, in general, a debt becomes harder to recover as more time passes.

For delinquent customers, you may consider negotiating a payment plan. Your organization can also invest in teaching staff how to use different debt collection software solutions—like customer-oriented online payment options, including Square and PayPal, or a unified debt collection software. Each can help staff collect from customers more effectively.

Problem #2: Cash flow is always low at the same time bills are due

Potential solution: Ask your creditors to adjust your billing cycle
By conducting regular cash flow analyses, your organization will gain greater insight into when your cash flow typically dips. These lows can immediately impact your organization’s ability to pay for necessities. For example, some organizations may realize that cash flow slows at the end of the month. That isn’t necessarily an issue, but it can become a problem if your organization’s bills are due at the end of the month.

Problem #3: The cost of storing merchandise is cutting into your cash flow

Potential solution: Improve your inventory management by considering projected demand
Part of selling physical products is figuring out how much merchandise to have on hand. The money your organization spends to store products—also known as “holding costs”—can be a significant expense on your cash flow analysis. An organization may be purchasing too much or not selling off their stock quickly enough

If you realize that your holding cost is greater than 20 – 30% of the inventory’s value, your organization may lose money on that inventory when it’s finally sold. Your organization can increase revenue and strengthen your cash flow by improving your inventory management. Forecast your sales and adjust your inventory based on projected demand. By doing so, you will cut down on holding cost and likely sell off your inventory sooner.

Problem #4: Your organization’s cash buffer is low

Potential solution: Cut down on expenses or consider ways to boost revenue
Conventional wisdom tells us that it isn’t a matter of if things will go wrong but when they will: Maybe an essential piece of machinery breaks, a natural disaster disrupts your supply chain, or an electrical fire burns part of your warehouse. None of these scenarios are necessarily insurmountable issues with adequate financial planning. A cash buffer acts as a safety net against unforeseeable events.

Ideally, your cash buffer should be the amount your organization needs to stay afloat for one month without incoming revenue. To calculate your cash buffer, divide your cash balance by your cash outflows during a cash flow analysis.

If your organization notices that its buffer is low, consider identifying ways to cut expenses or increase revenue. This may involve increasing prices or finding ways to operate more efficiently. It’s also useful to identify emergency financing options, like a business credit card or credit line, and have them ready before your revenue stream dries up.

By analyzing your cash flow regularly, you can uncover financial issues before they become major problems. And by identifying those concerns early on, you can boost revenue to head them off.