For any business, keeping track of cash flow is essential. Two important tools that businesses use to keep track of cash flow are cash flow statements and cash flow forecasts, but there’s often some confusion and misconceptions surrounding the two.
In this blog, we will compare and contrast these two tools and discuss how they are used to help businesses.
A peak inside:
First up that’s cover some basics.
What is Cash Flow?
Cash flow refers to the movement of cash in and out of a business or individual’s financial accounts. It is a measure of how much cash is generated or used by a business during a specific period of time, typically a month, quarter, or year.
Positive Cash Flow
A business is said to have positive cash flows when it’s generating more cash inflows than outflows, indicating that there is more money coming in than going out.
This can occur through increased sales, other cash payments, reduced expenses, or other factors that increase the amount of cash available.
Negative Cash Flow
On the other hand, a business is said to have negative cash flow when it’s spending more cash than they are generating, indicating that they are losing money.
This can occur due to increased expenses, decreased sales, or other factors in business activities that reduce the amount of cash available.
Net Cash Flow
Net Cash flow is simply the difference between a company’s total cash inflows and total cash outflows over a specified period of time, such as a month, quarter, or year. It is a measure of the net change in a company’s cash balance during that period.
Net Cash Flow = (Cash Inflows – Cash Outflows)
Note: This is NOT the same as the Net Income, and can be dramatically different during an given time period.
Check out our full article for more on the importance of tracking profits and cash flow for more.
Monitoring and managing cash flow is important for businesses and individuals to ensure they have enough cash to meet their financial obligations, pay bills, and invest in future growth opportunities.
Sources of Cash Flow
Operating cash flow refers to the cash generated or used in the day-to-day operations of a business, including sales and expenses, payment of salaries, and other operating costs.
Positive cash flow from operating activities indicate that a company is generating enough cash from its core business operations to fund its capital expenditures and dividends.
Cash flow form investing activities is related to the purchase or sale of long-term assets such as property, plant, and equipment, as well as investments in securities such as stocks and bonds.
Positive cash flow from investing activities indicate that a company is making wise investments in its future growth.
This refers to the cash generated from the financing of a company’s operations, including the issuance or repayment of debt, the issuance or repurchase of equity, and the payment of dividends.
Positive cash flows from financing activities indicate that a company is able to finance its operations through its own capital rather than relying on debt.
Together these encompass a company’s total cash flow.
Is a Cash Flow Statement the Same Thing as a Cash Flow Forecast?
And it’s a bit unfortunate that both terms start with ‘Cash Flow’.
A common misconception is that a cash flow statement and a cash flow projection/forecast are the same thing, or that you should only use/create one or the other other.
While they’re both closely related to cash flow, they have fundamental differences which make both distinct and valuable:
What is a Cash Flow Statement?
A cash flow statement is a financial statement that shows the inflow and outflow of cash for a specific period. It records the cash inflows and outflows from operating activities, investing activities, and financing activities.
The cash flow statement provides a snapshot of the actual cash flow situation of a business or individual during a specific period. A cash flow statement can be used to identify trends in a business’s cash flow, and help businesses with financial planning.
Below is example of what a typical cash flow statement might look like for a business from Accounting Coach.
What is a Cash Flow Forecast?
A cash flow forecast is an estimation of expected cash inflows and outflows for a future period. It predicts the future cash inflows and outflows based on the expected performance of the business or individual, and is used for planning purposes. Cash flow forecasting helps businesses make informed decisions about investments, expenses, and financing.
It is important to note that a cash flow forecast is just an estimation, and actual cash flows may differ from the forecasted cash flows.
Below is an example cash flow forecast created using our free template.
The Benefits of Cash Flow Forecasting
So why do businesses build a cash flow projection?
A cash flow projection…
helps with financial planning: Cash flow forecasting helps businesses to plan their finances better, enabling them to make informed decisions on how to allocate their resources.
helps identify potential shortfalls: By forecasting cash flow, businesses can identify potential cash shortfalls in advance and take necessary steps to avoid financial problems such as overdraft fees, missed payments, or other penalties.
helps with budgeting: By forecasting cash flow, businesses can create more accurate budgets, enabling them to set realistic financial goals and objectives. Budgets reflect what a business would like to see/expect to see happen , where as a cash flow projection predicts what is most likely to actually happen.
helps with managing working capital: Cash flow forecasting helps businesses to manage their working capital effectively, ensuring that they have enough cash to pay suppliers, employees, and other bills on time.
helps with securing financing: Lenders often require cash flow projections when evaluating loan applications. By having accurate cash flow forecasts, businesses can provide lenders with the necessary information they need to make informed decisions about financing.
& provides insights into business performance: Cash flow forecasting provides businesses with valuable insights into their financial performance, enabling them to identify areas for improvement and make informed decisions about future investments.
How to Create a Cash Flow Forecast
A cash flow projection begins with your opening cash balance and considers your accounts payable, accounts receivable, and future cash flows (in or out) that you have planned such as new projects or employee hires.
Calculating cash flow/ creating a cash flow projection can seem dauting at first, but thankfully there are many tools to help!
Fill out the form below to predict future cash flows with our free template below, or check out our full guide to cash flow forecasting here.
Looking to save time, improve accuracy, and automate the process? Check our list of the top 10 cash flow apps for small businesses here.
Key Differences Between Cash Flow Statement and Cash Flow Forecast:
Time Period: The cash flow statement shows the actual cash inflows and outflows that have occurred in the past, while the cash flow forecast predicts the expected cash inflows and outflows that will occur in the future.
Accuracy: The cash flow statement provides an accurate record of the actual cash flows, while the cash flow forecast is just an estimation and may differ from the actual cash flows.
Purpose: The cash flow statement is used to provide a snapshot of the actual cash flow situation and identify trends, while the cash flow forecast is used for planning purposes and to make informed decisions about investments, expenses, and financing.
Benefits of Using a Cash Flow Statement and Cash Flow Forecast:
Helps to understand the cash flow situation:
Both the cash flow statement and cash flow forecast provide valuable insights into the cash flow situation of a business.
Facilitates informed decision making:
The information provided by the cash flow statement and cash flow forecast can help businesses make informed decisions about investments, expenses, and financing.
Helps to identify trends:
The cash flow statement can be used to identify trends in cash flow, which can help businesses predict future cash flow situations.
Assists in planning:
The cash flow forecast can be used for planning purposes, and can help businesses plan for future expenses, investments, and financing.
While both the cash flow statement and cash flow forecasting are important tools for businesses, they serve different purposes.
The cash flow statement provides a record of actual cash flows, while the cash flow forecast provides an estimation of expected cash flows.
Both tools are essential for businesses to understand their financial health and cash flow situation and make informed decisions about their finances.
Until next time!