Cash Flow Statement vs. Projection: What is the Difference?

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.

What is a Cash Flow statement?

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:

1. Operating Activities: These are cash flows related to the company's primary business activities, such as sales, collections from customers, payments to suppliers, and payments to employees.
2. Investing Activities: These are cash flows related to the purchase or sale of long-term assets, such as property, plant, equipment, or investments.
3. Financing Activities: These are cash flows related to the company's financing activities, such as the issuance or repayment of debt, equity, or dividends.

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:

• Sales: $10,000
• Customer Payments: $8,000
• Loan Proceeds: $5,000

Total Cash Inflows: $23,000

Cash Outflows:

• Rent: $2,000
• Salaries and Wages: $6,000
• Office Supplies: $500
• Utilities: $1,000
• Loan Repayment: $1,000

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

How To Use Cash Flow Statements to Measure Business Performance

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.

What is a Cash Flow Projection?

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

How are Projections Different from Statements?

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.

Factors that can affect cash flow projections

Several factors can affect cash flow projections, including:

1. Seasonality: Many businesses experience seasonal fluctuations in revenue and expenses, which can affect their cash flows. A cash flow projection can help identify these seasonal trends and plan accordingly.
2. Changes in expenses or revenue: Changes in expenses or revenue can impact a business's cash flow. For example, a sudden increase in expenses or a decrease in revenue can cause cash flow problems. By projecting cash flows, a business can anticipate these changes and plan accordingly.
3. Timing of payments: The timing of payments can affect a business's cash flow. For example, suppose a business has a large payment due at the beginning of the month. In that case, it may experience a cash shortage until it receives payment from customers later in the month. A cash flow projection can help a business identify these timing issues and plan accordingly.

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.

Tips for Creating Effective and Reliable Cash Flow Projections

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.

Differences Between Cash Flow Statements and Projections

While cash flow statements and projections share similarities, they differ in several ways.

Timing

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.

Level of detail

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.

Usefulness

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.

Smooth Out Your Cash Flow With Additional Funding

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!