Are you a small business owner confused by the terms "cash flow statement" and "cash flow projection"? You're not alone. While they sound similar, understanding the distinctions between these two documents can help you better track your finances and feel prepared for whatever comes your way.
Learning about cash flow statements vs. projections is one of the most important steps in creating a reliable financial strategy for your small business - so don't let any more time pass without getting up to speed! We'll explain what each document entails and discuss how best to leverage them as part of a comprehensive financial plan.
A cash flow statement is a financial statement that shows the inflows and outflows of cash for a particular period. It is an essential tool for small business owners to understand their financial position, analyze the cash flows of their operations, and make informed decisions.
A cash flow statement includes three key components:
Here's a simple example of a cash flow statement that shows the inflows and outflows of cash for a small business in a month:
Cash Inflows:
Total Cash Inflows: $23,000
Cash Outflows:
Total Cash Outflows: $10,500
Net Cash Flow: $12,500
In this example, the small business has a positive net cash flow of $12,500, which means it has generated more cash inflows than outflows during the month. This information can help business owners make informed decisions about their finances and plans.
Related Reading: How to Increase Your Business's Cash Flow
One valuable tool for assessing financial performance is the cash flow statement. This financial document shows the amount of cash coming in and going out of a business over a set period. By analyzing this information, business owners and investors can better understand a business's financial health and make informed decisions about its future.
The cash flow statement can highlight if a business is generating positive cash flow, indicating a healthy financial position, or negative cash flow, which may signal the need to change the company's operations. In short, mastering cash flow statements is essential for any business looking to measure and improve its financial performance.
A cash flow projection is a financial statement that estimates the cash inflows and outflows a business will likely experience over a future period. Cash flow projections are essential for small business owners to plan for the future, identify potential cash shortages, and make informed decisions.
Related Reading: Top Three Financial Statements Every Business Owner Needs to Know
While a cash flow statement shows the actual inflows and outflows of cash for a particular period, a cash flow projection is a forward-looking statement that estimates the expected cash flows for a future period. In other words, a cash flow statement provides a historical view of cash movements. In contrast, a projection estimates future cash movements based on expected activities.
Several factors can affect cash flow projections, including:
By understanding the factors that impact cash flow projections and creating a detailed projection, small business owners can better manage their finances and set their businesses up for success.
To ensure the accuracy and reliability of your cash flow projection, it is important to deeply understand your business finances, including expenses, revenue, and cash inflows and outflows. Forecasting tools and software can also streamline the process and help identify potential gaps or issues early on.
Regularly reviewing and adjusting your projections can help you stay on track and make informed financial decisions. By staying organized, knowledgeable, and proactive, you can create cash flow projections that will help guide the success of your business.
While cash flow statements and projections share similarities, they differ in several ways.
The most significant difference between cash flow statements and projections is the timing of when cash flows are recorded. Cash flow statements show the actual cash inflows and outflows for a past period. In contrast, cash flow projections estimate the expected cash inflows and outflows for a future period.
Cash flow statements provide a detailed account of actual cash flows during a given period. They break down cash flows into operating, investing, and financing activities. In contrast, cash flow projections are more generalized and estimate expected cash flows for a future period. As a result, they may not provide the same level of detail as a cash flow statement.
Cash flow statements are primarily used to track the performance of a business over a specific period. They help business owners and investors understand how much cash is coming in and going out of the business. On the other hand, cash flow projections are more useful for planning and decision-making.
Business owners can identify potential cash shortages by estimating future cash flows and making informed decisions about investments, expenses, and growth opportunities.
By understanding the differences between cash flow statements and projections, small business owners can use these tools more effectively to manage their finances and plan for the future.
Having control over cash flow is key to a successful business. With additional funding, you can smooth out your cash flow and ease concerns about having enough in the bank to keep your business afloat. Through the Fundid Capital Marketplace, you can get connected to lenders who are ready to serve your small business and provide you the additional funding you are looking for!