Creating a Cash flow forecast allows a business to plan for the future and identify any potential cash flow issues.
A cash flow forecast attempts to predict future inflows and outflows over a period of time, whereas a cash flow statement is a historical record of the actual cash inflows and outflows over a period of 12 months. It has already happened. A cash flow forecast helps the business to look ahead and to make business decisions.
Remember for the exam:
Cash Inflows
This is all the money that a business expects to receive and bring in over a given period.
Example:
| Inflows | January (£) | February (£) | March (£) |
|---|---|---|---|
| Sales Revenue | 10,000 | 12,000 | 15,000 |
| Investment Income | 10,500 | 600 | 500 |
| Total Cash Inflow | 10,500 | 12,600 | 15,500 |
Cash Outflows
This is all the money that a business expects to pay out over a given period.
Example:
| Outflows | January (£) | February (£) | March (£) |
|---|---|---|---|
| Cost of Goods Sold | 4,000 | 4,500 | 5,000 |
| Operating Expenses | 3,500 | 3,500 | 3,700 |
| Taxes | 1,200 | 1,200 | 1,200 |
| Loan Payments | 500 | 500 | 500 |
| Total Cash Outflow | 9,200 | 9,700 | 10,400 |
Net Cash Flow
This is the difference between the cash inflow and cash outflow.
Net Cash Flow = Total Cash Inflow – Total Cash Outflow
A positive net cash flow means the business has good liquidity 👍 and a negative net cash flow means the business has poor liquidity 👎 and may struggle to pay its bills and debts.
Example:
| January (£) | February (£) | March (£) | |
|---|---|---|---|
| Total Cash Inflow | 10,500 | 12,600 | 15,500 |
| Total Cash Outflow | 9,200 | 9,700 | 10,400 |
| Net Cash Flow | 1,300 | 2,900 | 5,100 |
Opening Balance
The opening balance is the amount of money you have at the start of the month. For January, this might be your balance as of December 31. It will be the same as the last month’s closing balance
Example:
| January (£) | February (£) | March (£) | |
| Opening Balance | 5,000 | 6,300 | 9,200 |
Closing Balance
The closing balance is the opening balance plus the net cash flow. This will also be the opening balance for the next month.
Closing Balance = Opening Balance + Net Cash Flow
Example:
| January (£) | February (£) | March (£) | |
|---|---|---|---|
| Net Cash Flow | 1,300 | 2,900 | 5,100 |
| Opening Balance | 5,000 | 6,300 | 9,200 |
| Closing Balance | 6,300 | 9,200 | 14,300 |
Remember that cash flow forecasting is a planning tool and will never be 100% accurate. It is like predicting the weather and is a way to anticipate cash needs and plan for different scenarios.
| January (£) | February (£) | March (£) | |
|---|---|---|---|
| Inflows | |||
| Sales Revenue | 10,000 | 12,000 | 15,000 |
| Investment Income | 500 | 600 | 500 |
| Total Cash Inflow | 10,500 | 12,600 | 15,500 |
| Outflows | |||
| Cost of Goods Sold | 4,000 | 4,500 | 5,000 |
| Operating Expenses | 3,500 | 3,500 | 3,700 |
| Taxes | 1,200 | 1,200 | 1,200 |
| Loan Payments | 500 | 500 | 500 |
| Total Cash Outflow | 9,200 | 9,700 | 10,400 |
| Net Cash Flow | 1,300 | 2,900 | 5,100 |
| Opening Balance | 5,000 | 6,300 | 9,200 |
| Closing Balance | 6,300 | 9,200 | 14,300 |
