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Cash Flow Statement and Cash Flow Forecast: Why You Need Both

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cash flow forecast vs cash flow statement

Cash flow is a make-or-break factor for small to medium-sized enterprises (SMEs). Whether you’re a manufacturer or a service-based business, you pay your expenses and fund your business through money that comes from your operating cash flow.

Managing cash flow is crucial to ensuring that you have enough money to cover the bills, fuel growth and respond to the unexpected. However, many businesses walk an extremely fine line with only enough cash reserves to cover 27 days of expenses. Depending on the industry, some businesses only have a $7 difference between the money coming in and the amounts owed.

At ForwardAI, we realize that If you want your business to survive, you have to keep a close eye your cash flow using both your cash flow statement and cash flow forecast. Each tool plays a pivotal role in providing you the information you need to identify your strengths and weaknesses.

Your cash flow statement: What it is

There are three financial statements that every business should create and review on a regular basis: your income statement (profit & loss), balance sheet and cash flow statement (statement of cash flows). (All of these statements are pulled from the data entered into your accounting software.)

Your income statement tells you if your business is earning a profit and your balance sheet compares what you own to what you owe. A cash flow statement, which pulls numbers from your income statement and balance sheet, shows how cash is being used within your business.

A cash flow statement compares inflows and outflows in three areas:

1. Operations

The day-to-day costs of producing, promoting and delivering your bread-and-butter products and services.

2. Investment

For most SMEs, this is the purchase or sale of capital investments, such as buildings, land and equipment.

3. Financing

Includes all funding activities.

    • For startups and businesses with investors, investment dollars are tracked here.
    • For businesses with shareholders, related activities are tracked under financing.

There are two methods for creating a cash flow statement: direct and indirect. If you use the direct method, you follow a cash-based accounting system where you track payments as they’re made or received. If you use the indirect method, you follow accrual accounting rules where payments are recorded before they’re received.

Your cash flow statement: What it tells you 

Whether you create a one every week, month or quarter, your cash flow statement shows you how much money you’re bringing in and paying out over that particular period of time.

Another way of saying this is that a cash flow statement indicates your cash position at a set point. It’s basically a summary of this equation:

Cash in (inflows) — cash out (outflows) = cash position (positive, negative or break-even)

What it lacks is any historical (longitudinal) information or in-depth analysis. However, a cash flow statement is a key building block of a cash flow forecast.

Your cash flow forecast: What it is

A cash flow forecast (cash flow projection) uses insights and analysis to anticipate how a business’ cash flow will perform over time. As the reporting tool for cash flow, a cash flow statement is foundational to cash flow forecasting.

cash flow forecast helps you examine how key variables have performed in the past — in order to help you predict how they’ll behave in the future. Using operational cash flow as an example, forecasted cash flows help you delve into trends on how expenses like labor, utilities, materials compare with sales over a given month, quarter or year.

Businesses with volatile cash flow will sometimes perform cash forecasts on a weekly basis in order to assess their constantly changing cash flow position.

Your cash flow forecast: What it tells you  

The phrase “over time” is key in defining the benefits of cash forecasting. By looking back and examining data from previous cash flow statements, you’re better able to identify:

  • Potential surpluses and deficits in your total cash flow.
  • When your incomes are highest and lowest.
  • When your expenses are highest and lowest.
  • The impact of the cycles in your accounts receivable and accounts payable.
  • How your debt levels and the costs of these debts are affecting your cash flow, how well you’re maximizing your current funding and your ability to qualify for further financing.

Knowing your current and long-term cash positions also lets you make more informed business decisions. If you’re planning on hiring, you’ll be able to predict if your business can handle the additional costs. The same is true for almost any growth initiatives, from research and development to expansion. And should you encounter a cash flow crisis, the more you know about what contributed to the shortfall will help you find the best way to recover.

Tools, like our cash flow forecast, help you take the information from your basic financial statements and make them easier to visualize. Spreadsheets are one thing, but charts and graphs give you complete picture that data points alone can’t provide. Your risk score, housed within the cash flow forecast, also gives you a reference how external lenders and vendors view your business in terms of financial risk.

The benefits of better cash flow

Businesses with a strong, stable cash flow are better able to seize growth opportunities and withstand unexpected expenses. The better your financial health, the more likely you are to secure more favorable terms with lenders and vendors as well. Not to mention, the simple peace of mind of knowing that everything’s under control.

In a perfect world, every business would be cash flow positive. But nothing’s ever black-and-white. This is why cash flow forecasting can also help a business solve cash flow problems by pinpointing problem areas in order to formulate solutions. Even businesses looking to rebuild credit benefit from cash flow forecasting. Especially, if you use your cash forecast to ensure that you’ve got the funds to schedule timely repayments.

Create a cash flow forecast — using your current financial data from your QuickBooks Online account.

All you have to do is connect ForwardAI Predict, connect your account and run your report. Plus, there’s no charge for signing up or running your report.

The information in this article is not financial advice and does not replace the expertise that comes from working with an accountant, bookkeeper or financial professional.


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