Cash Flow Statement vs Cash Flow Projection
Those who are learning to understand different financial statements, must learn to understand the difference between cash flow statement and cash flow projection too as they provide two different views of the financial health of an organization. Businesses prepare a number of financial statements including income statements, balance sheets and cash flow statements in order to determine a company’s financial health. Cash flow statement offers an overview of the inflows and outflows of cash for the period, providing a useful overview of the firm’s cash position. Cash flow projections, on the other hand, offers a futuristic view of the inflows and outflows and help managers plan business activities for the future. The following article takes a closer look at each statement and highlights the similarities and difference between cash flow statement and cash flow projection.
What is Cash Flow Statement?
A firm’s cash flow statement offers a clear overview of how a company’s operations are run, where funds come from and how those funds are spent. The cash flow statement clearly shows the movement of cash around the business and offers a snapshot of the firm’s cash position. All these cash receipts and payments are then summed up together to derive at a figure known as the net cash flow, which is essentially the cash that is left over once all cash coming in and going out have been accounted for. The cash flow statement is split up into a number of sections which include: operating activities, investing activities and financing activities. Operating activities are those activities that help a company generate revenue. Investing activities refer to any cash movements in the firm’s investments and any longer term investments. Financing activities refer to any activities related to the firm’s shareholders and creditors. If the cash flow statement is done up accurately, the totals of these three segments should add up to firm’s overall total cash flow.
What is Cash Flow Projection?
Cash flow projection is an estimate of any cash inflows and outflows that a firm is to expect in the future. Cash flow projections also take into consideration the effect that certain expenses and investments will have on the firm’s future net cash flow. A cash flow projection offers managers a clear overview of the financial feasibility and viability of certain business activities and decisions. An accurate cash flow projection offers a good estimate of the firm’s cash inflows. This aids in financial planning as businesses can schedule payments to vendors and suppliers as well as plan for internal cash outflows for expenses such as rent, wages, advertising, etc. In order to create a cash flow projection, a company must first determine the purpose for which the projection is required. Determining the purpose also tells you what time frame the projection must be made for. If the projection is for the purpose of determining year end profitability, the financial managers have to analyze the amounts of inflows and outflows that are incurred during the financial year. Sales make up the largest portion of cash inflows for the year, even though sales figures are quite difficult to project. Most companies use historical sales data for this purpose.
What is the difference between Cash Flow Statement and Cash Flow Projection?
Cash flow statement and cash flow projection are both financial statements that are prepared with the aim of obtaining a clear picture of a firm’s financial position. While cash flow statement offers an overview of the firm’s current year’s inflows and outflows, cash flow projection, on the other hand, projects the firm’s inflows and outflows that are to be expected in the future. While both offer managers additional information for decision making, cash flow projection in particular offers detailed information for future planning. Cash flow projection aids businesses to make important decisions about the firm’ s finances. Accurate cash flow projections are essential to the financial health of a firm.
Summary:
Cash Flow Statement vs Cash Flow Projection
• A firm’s cash flow statement offers a clear overview of how a company’s operations are run, where funds come from and how those funds are spent.
• The cash flow statement clearly shows the movement of cash around the business and offers a snapshot of the firm’s cash position.
• Cash flow projection is an estimate of any cash inflows and outflows that a firm is to expect in the future.
• An accurate cash flow projection offers a good estimate of the firm’s cash inflows. This aids in financial planning as businesses can schedule payments to vendors and suppliers as well as plan for internal cash outflows and expenses.
• Cash flow statements and cash flow projections are both financial statements that are prepared with the aim of obtaining a clear picture of a firm’s financial position.
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