Cash Flow Forecasts (SL IB Business Management)

• A cash flow forecast is a prediction of the anticipated cash inflows and  cash outflows, typically for a six to twelve month period
• A detailed business plan should include a cash flow forecast that allows the business owners to identify its financial needs
  
  

Key terminology and an example

• The net cash flow is calculated by subtracting total outflows from total inflows
• The opening balance is the previous month’s closing balance carried forward
• The closing balance is calculated by adding the net cash flow to the opening balance
   

An Example of a Start-up Six-month Cash Flow Forecast (£s)

Analysis of the cash flow forecast example

Executive Summary

• Overall, this cash flow forecast supports an application for the business to borrow £6,000 in January to covert the initial low inflows, significant outflows and negative net cash flow
• As sales increase from June, inflows are greater than outflows and the business has a positive cash flow
• Should a loan be approved, the business will require any short-term sources of finance such as overdraft facilities

January

• The cash flow forecast assumes that the bank approves a £6,000 loan in January (capital introduced)
• The opening balance of £500 has been introduced by the owner
• The business is expected to achieve sales of £2,600
• Total inflows are therefore expected to be £8,600 (£2,600 + £6,000)
• Total outflows are expected to be £4,770
• The Net Cash Flow is expected to be £3,830 (£8,600 - £4,770)
• January’s closing balance is expected to be £4,330 (£3,830 + £500)

February

• The closing balance from January becomes the opening balance for February
• Sales of £2,800 as expected to be the business total inflows 
• Total outflows are expected to be £4,414 
• The Net Cash Flow is expected to be -£1,614 (£2,800 - £4,414) 
• The closing balance is expected to be £2,716 (-£1,614 + £4,430) 

March

• The closing balance from February becomes the opening balance for March
• The business expects to achieve sales of £3,100 as its total inflows 
• Total outflows are expected to be £4,524
• The Net Cash Flow is expected to be -£1,424 (£3,100 - £4,524) 
• The closing balance is expected to be £1,292 (-£1,424 + £2,716) 

 April

• The closing balance from March becomes the opening balance for April
• Sales of £4,600 are expected as the businesses total inflows 
• Total outflows are expected to be £5,076
• The Net Cash Flow is expected to be -£476 (£4,600 - £5,076) 
• The closing balance is expected to be £816 (-£476 + £1,292) 

May

• The closing balance from April becomes the opening balance for May
• The business expects to achieve sales of £4,800 as its total inflows 
• Total outflows are expected to be £4,976
• The Net Cash Flow is expected to be -£176 (£4,800- £4,976) 
• The closing balance is expected to be £640 (-£176 + £816) 

June

• The closing balance from May becomes the opening balance for June
• Sales of £5,200 are the business total inflows 
• Total outflows are expected to be £5,026
• The Net Cash Flow is expected to be £174 (£5,200-£5,026) 
• The closing balance is expected to be £814 (£174 + £640) 

• Cash flow forecasts provide insights into the expected inflows and outflows of cash over a specific period
   
• By analysing these forecasts over time, businesses can better plan and allocate their financial resources
   
• It is also important to recognise that cash flow forecasts have limitations
    

The Uses & Limitations of Cash Flow Forecasts