Is your cash flow starting to feel a bit like a rollercoaster ride but without the thrilling ups and downs?

One day, you're stacking dough, and the next, you're scraping together every last cent to pay your suppliers.

It's the classic small business cash flow conundrum, and you're not alone.

Let's dive into the world of cash flow analysis to help you smooth out those financial peaks and valleys.

Challenges in ensuring the financial health of your venture are endless. One of the most critical aspects of managing your business’s finances is understanding and effectively utilizing cash flow analysis. In this article, we’ll explore what cash flow analysis is and how you can use it to build a robust and sustainable business model.

What is Cash Flow Analysis? 

Cash flow analysis is a vital financial tool that enables you to assess the movement of money in and out of your business over a specific period.

It provides a clear picture of your business’s liquidity, allowing you to make informed decisions about managing your finances.

To illustrate, let’s consider a digital business as an example.

Imagine you run an e-commerce store. Cash flow analysis would help you track the cash coming in from customer purchases and outgoing cash for expenses like inventory, marketing, and salaries. By monitoring these flows, you can identify trends, forecast future cash needs, and ensure your business remains financially stable.

Watch the video below to learn more about cash flow analysis for business health assessment:

Types of Cash Flow Analysis

Each of the common types of cash flow analysis offers a unique perspective on your business’s financial health.

  1. Operating Cash Flow Analysis: This type focuses on the core operations of your business, examining the cash generated and spent from day-to-day activities. It provides insights into how well your business manages its basic functions and whether it generates enough cash to cover daily expenses.
  2. Investing Cash Flow Analysis: Here, you evaluate the cash flow associated with investments in assets like property, equipment, or other businesses. It helps you assess the impact of long-term investments on your cash reserves and future profitability.
  3. Financing Cash Flow Analysis: This type centers on how your business raises and repays capital. It covers activities such as taking out loans, issuing shares, or paying dividends. Understanding your financing cash flow is crucial for maintaining a healthy balance between debt and equity in your capital structure.
  4. Free Cash Flow Analysis: Free cash flow represents the cash remaining after all operating and capital expenditures are accounted for. It’s a key indicator of your business’s ability to generate excess cash that can be reinvested or distributed to stakeholders.
  5. Indirect Cash Flow Analysis: This approach starts with net income and adjusts it for non-cash items and changes in working capital. It’s often used to reconcile differences between net income and cash flow from operating activities on the cash flow statement.

Various types of cash flow analyses provide a comprehensive understanding of your business’s financial dynamics and help you make informed decisions to navigate the financial challenges effectively.

How to Use Cash Flow Analysis to Assess Your Business Model 

Now that we’ve defined cash flow analysis, let’s delve into how you can use it to evaluate your business model effectively. To begin, you’ll need to understand a few key financial concepts:


Overhead refers to the ongoing operational costs of your business that aren’t directly tied to producing goods or services. These expenses include rent, utilities, insurance, and administrative salaries.

Costs Related to Sales 

These are the expenses directly associated with delivering your product or service to customers. For an e-commerce store, this might include the cost of goods sold, shipping fees, and payment processing charges.


Revenue is the total income generated from selling your products or services.

Contribution Margin 

Contribution margin is a critical metric that shows how much revenue remains after covering the costs related to sales. It’s calculated as (Revenue – Costs Related to Sales) / Revenue. A healthy contribution margin indicates the profitability of each sale.

The Key to Using Cash Flow Analysis Effectively 

Ensure that your revenue and costs related to sales grow without significantly increasing your overhead. When your overhead consistently rises in tandem with your sales, it can hinder scalability.

To determine the scalability of your business model, calculate your unit economics. Unit economics simply means understanding your client’s revenue and how much you spend to fulfill that revenue. 

Aim for a 50% profit margin, which means that half of your revenue should be profit after covering costs related to sales and overhead.

Additionally, consider securing 50 to 100% of your revenue upfront each month. Having this money on hand will enable you to cover expenses such as marketing, your team’s salaries, and other operational costs.

Finally, ensure that your pricing and deliverables are structured in a way that the cost of providing your product or service doesn’t exceed a 50% profit margin. This ensures that your business remains sustainable in the long run.

So, When Is Your Business Model Healthy?

By understanding and applying the principles of overhead, costs related to sales, revenue, and contribution margin, you can assess the sustainability of your business model.

Aim for a 50% profit margin and strive to secure 50 to 100% of your revenue upfront each month to ensure that your business remains financially robust.

When you respect these two crucial aspects, you can be confident that your business model is on the path to success and growth.

Ready to take charge of your business’s financial future and build a robust business model?

Don’t miss out on the opportunity to equip yourself with essential skills and insights.

Get free access to our AI-powered Business Blueprint and learn how to master critical aspects of financial management.

Click below to get started:

AI-powered business blueprint


How to Productize Consulting Services (VIDEO)

Are you facing the scaling dilemma that so often tugs at the fabric of quality service delivery?

Feel the weight of burnout, a pervasive shadow in the consulting world?

Grapple with resource allocation issues, juggling the dynamic project scopes and demands that make each day unique?

Within these challenges lies the promise of a new approach—the art of productizing consulting services.

4 minutes read time

How to Let Go of Control Anxiety: The Busy CEO’s Guide to Reducing Stress

What story are you telling yourself when pursuing your goals?

The drive to achieve your goals can be either exciting and energizing or stressful and anxiety-promoting.

It all depends on the words you use in your story and understanding how your thoughts create your mindset, actions, and behaviors. 

5 minutes read time

B2B Lead Generation KPIs Scaling Strategy for 2024

Understanding KPIs is like touching the pulse of your business's performance. 

B2B (business-to-business) lead generation minus choosing the right key performance indicators (KPIs) can kill or cure the health of your growth strategy. 

Selecting, measuring, and evaluating the right B2B lead metrics is crucial to building a profitable sales funnel and ensuring sustainable business success.

4 minutes read time