Cash-flow forecasting
A cash-flow forecast is a prediction of the cash a business expects to receive, called inflows, e.g. cash sales, payments from credit customers, and pay out, called outflows, e.g. wages, rent, payments to suppliers, over a future period, usually broken down month by month.
Method
- List the expected cash inflows for the period, e.g. cash sales, receipts from credit customers, loans received.
- List the expected cash outflows for the period, e.g. wages, rent, supplier payments, loan repayments.
- Calculate net cash flow for each month: total inflows - total outflows.
- Calculate the closing balance for each month: opening balance + net cash flow for that month.
- Carry the closing balance forward as the next month's opening balance.
- Identify any month where the closing balance is negative, since this signals a cash shortfall that needs to be planned for in advance.
- When asked to complete a forecast, work left to right, one column (month) at a time, checking each closing balance before moving to the next month.
Worked example
A business's cash-flow forecast for March shows an opening balance of 2,500 pounds. Its forecast cash inflows for March are 9,000 pounds and its forecast cash outflows are 10,200 pounds. Calculate the net cash flow for March and the closing balance at the end of March.
- Calculate net cash flow: total inflows - total outflows = 9,000 - 10,200 = -1,200 pounds.
- Calculate the closing balance: opening balance + net cash flow = 2,500 + (-1,200).
- Calculate: 2,500 - 1,200 = 1,300 pounds.
- State the answer: the net cash flow for March is -1,200 pounds, and the closing balance at the end of March is 1,300 pounds.
Practice questions
Try each question, then tap to reveal the answer.
Q1What is the difference between a cash inflow and a cash outflow?Show answer
Answer: A cash inflow is money coming into the business, e.g. cash sales; a cash outflow is money leaving the business, e.g. paying wages or suppliers.
Q2State the formula for net cash flow.Show answer
Answer: Net cash flow = total cash inflows - total cash outflows.
Q3State the formula for a month's closing balance.Show answer
Answer: Closing balance = opening balance + net cash flow for the month.
Q4A business has an opening balance of 1,000 pounds, inflows of 6,000 pounds and outflows of 5,200 pounds for the month. Calculate its closing balance.Show answer
Answer: Net cash flow = 6,000 - 5,200 = 800 pounds. Closing balance = 1,000 + 800 = 1,800 pounds.
Q5What becomes the opening balance for April if a business's closing balance for March is 1,300 pounds?Show answer
Answer: 1,300 pounds - March's closing balance becomes April's opening balance.
Q6Why might a business prepare a cash-flow forecast even if it expects to be profitable for the year?Show answer
Answer: Because it may still have months where outflows exceed inflows, e.g. due to seasonal demand or paying a large supplier bill, and the forecast helps it spot and plan for these cash shortfalls in advance.
Q7A business forecasts an opening balance of -500 pounds for June, inflows of 4,000 pounds and outflows of 3,200 pounds. Calculate the closing balance.Show answer
Answer: Net cash flow = 4,000 - 3,200 = 800 pounds. Closing balance = -500 + 800 = 300 pounds.
Exam-style questions
Written in the style of a GCSE Business exam paper, with a full mark scheme.
Table 3 shows part of a business's cash-flow forecast, with the outflow figure for May missing. These figures are for practice only. April: opening balance 3,000 pounds, inflows 8,500 pounds, outflows 7,800 pounds, closing balance to be calculated. May: opening balance carried from April, inflows 9,200 pounds, outflows unknown (labelled x), closing balance 4,700 pounds. (a) Calculate April's closing balance. (2 marks) (b) State May's opening balance. (1 mark) (c) Calculate May's outflows (x). (4 marks)
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Assess how useful a cash-flow forecast is in helping a new business avoid running out of cash in its first year of trading.
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Free printable worksheet
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