The Importance of Cash Flow Statements and Projections

by Kurt Forster | September 17, 2019

Business is finally booming for ABC Cabinets. The owner is now booking more jobs than he ever has before. He has six jobs in the pipeline, so he decides to buy all of the materials ahead of time so he can focus on knocking them out back-to-back in a timely manner.

Though his accountant is telling him that financially he is doing great, after buying all of the materials for these future jobs, his bank account paints a different picture—it is empty.

This may be a common scenario for business owners who don’t realize the importance of a cash flow statement and/or a cash flow projection. Even if a business owner relies on guidance from a CPA or other accounting professionals, these professionals are so focused on the balance sheet and income statement, that they don’t use cash flow statements very often. However, both are extremely helpful for business owners when managing their money.

Let’s start with the difference between a cash flow statement and a cash flow projection.

Cash Flow Statement: existing numbers from the past

Cash Flow Projection: future numbers predicted

All of the numbers that are in a cash flow statement derive directly from the income statement, but the income statement doesn’t show exactly where or when the money comes in and out. This is important information for a business owner to have in order to ensure that the business has enough cash at all times.

Making a cash flow projection is simply a matter of adding up all of the money that comes into a business, setting that number aside for the month, then adding all of the expenses that go out of the business for the month, and subtracting the expenses from the income.

Managing a cash flow statement and projection is a very simple task the owner can do on their own. Often times, when the owner requests the document from their accountant, they may receive a statement of cash flow and that is not an adequate look into the spending habits, the way a cash flow statement would be.

There is an easy tool for a business owner to use – Microsoft Excel. Excel has several templates that make is easy for novice business owners to begin working on the statements as soon as possible.

Another way the statements and projections are useful to a business owner is when they are obtaining a loan. Previously the banks relied on just the financial statements, income statements and tax returns. However, recently, the cash flow projection has become the statement most important to banks during the loan process.

The projection helps the bank make decisions based on the spending habits and financial decision-making of the owner so they can ensure the probability of the owner staying on track.

Just like in the ABC Cabinets example, a lot of business owners may have more income at the end of the month, but they may also have more expenses. With the cash flow statement and projection, the owner is able to track and make sure they’re on track with paying bills and are still able to accommodate future clients.