Contrary to what some business owners may assume, a cash flow forecast is different from a cash flow statement
Cash flow forecasts look forward while cash flow statements look at the past to report cash generated. Cash flow statements are critical financial statements and are very useful in determining the short-term viability of a business; particularly its ability to pay bills.
A cash flow statement accounts for the cash that has come into a business over a quarter or year and the cash the owner has paid out. The statement is prepared along with a business’s balance sheet and profit and loss (P&L) statement.
While they are similar, P&L statements track revenues and expenses as and when they occur. A cash flow statement allows owners to see how much cash their business has generated and excludes non-cash revenues and expenses.
P&L statements do not track when cash enters a business’s bank account and going off these statements alone will not paint an accurate picture of a business’s cash posture.
For those who seek investment, a cash flow statement is particularly important as it provides a clear idea of the short-term viability of a business. For businesses that consistently generate more cash than they spend, the statement can also shed light on:
- The business’s ability to pay off debt
- Potentially increasing the business’s dividend