The Difference Between a Cash Flow Forecast and a Cash Flow Statement – And Why You Need Both

Customer paying for their order with a credit card in a cafe. Bartender holding a credit card reader machine and returning the debit card to female customer after payments.

Do you know if your business has enough cash to survive? Cash flow problems are among the top reasons why small businesses close their doors. Strong sales or profit margins won’t help you if your business doesn’t have cash on hand to pay its bills and invest in the future.

That’s why it’s critically important to maintain an accurate cash flow forecast and cash flow statement. But what role does each play in the planning process and how can they help you manage your cash position? Let’s take a look.

Your Cash Flow Forecast

With a well prepared cash flow forecast (aka cash flow projection) you’ll be able to see which months you’re likely to experience a cash surplus, and which months may result in a deficit. This is important for a number of reasons:

  • It helps you identify potential problems. A lack of cash can be a big problem for small businesses, but having an accurate forecast can help you spot potential shortfalls several months in advance.
  • You can then prevent or mitigate the impact. By knowing what’s coming you can take steps to mitigate the impact of a cash flow shortage. Consider stepping up collections, invoicing earlier, negotiating better terms from suppliers, refinancing debt, or drawing on a line of credit from your bank.
  • You’ll also ensure you have cash on hand to pay bills and make payroll.
  • It can help you stay profitable. If you foresee a cash deficit, this may impinge on your ability to fund marketing and growth, and pay the employees who help you achieve success.
  • It will satisfy your bank manager. If you’re seeking funding, your lender will want to see your forecast to determine your future ability to repay the loan.

Your cash flow forecast should contain your estimated cash revenues for a time period (the ones that you collect, not credit) and your cash expenditures per month. By reconciling these two numbers (extract expenditures from cash revenues) you’ll have some assumptions to play with.

Your Cash Flow Statement

Just as planning for the future is critically important, you also need to review past performance. For that you’ll need a cash flow statement.

But how is this different to your cash flow forecast? Just as your bank statement tells you the state of your finances over previous months, your cash flow statement records the cash that has entered and exited your business over the past month, quarter, or year.

By comparing your opening and closing balance you’ll be able to see how much cash your business is generating and how it’s moving in (via sales, dividends, investments, etc.) and out of your business (payroll, loan repayments, bills, etc.).

This is important for several reasons:

  • Your cash flow statement can inform your cash flow position. If your business is generating more cash than it is spending, then you are in a cash flow positive situation. However, if your outgoings for the period exceed the amount of cash you have coming in, or the timing of the cash exiting and entering is not in synch, then you’re experiencing a cash flow problem.
  • Investors scrutinize it. Potential lenders will review your statement to gauge your historical cash flow position and how it’s tracked over time.
  • It can also inform your forecast. Your cash flow statement is a useful tool in helping you develop your cash flow forecast. For example, if a particular time period is consistently problematic (such as year-end or your quiet season) build that into your forecast and, again, take steps to alleviate any impact well ahead of time.
  • It sheds light on your forecasting ability. If your cash flow forecast is working for you, your cash flow statement will reflect it. If not, then revisit your projections and work through any discrepancies. It’s also a good idea to talk to an accountant to see how you can better plan for the future.

Creating Your Cash Flow Documents

You have several options for creating your cash flow forecast and statement. Most accounting software packages include ready-made accounting reports which can be run automatically, including cash flow statements, profit and loss, etc. More sophisticated reports even allow you to predict cash flow by client so that you can see who pays you on time and who’s delinquent (an essential part of the forecasting exercise). Cash flow templates are also widely available online.

If you’re starting afresh with cash flow forecasting and analysis, consult your accountant so that you have a clear idea of what to include, how to analyze your data, and warning signs to observe.

Pay Attention to Timing

The critical thing to remember about cash flow is that timing plays a large part in your cash position. If money exits your business before your cash revenues are realized, you may have a problem. For example, if a client pays you late or you run into an unexpected expense, then things can get dicey. Try to build as many of these variables into your forecast, and maintain a financial cushion or back-up plan to ensure you don’t get sidelined by these realities.

Your cash flow documents are at the core of good cash management. Don’t compromise your growth by ignoring these valuable tools.