Cash & Cash Flow Forecasts (Edexcel GCSE Business)
Revision Note
Written by: Lisa Eades
Reviewed by: Steve Vorster
The Importance of cash to a Business
Profit and cash are different financial terminologies
Profit is simply the difference between sales revenue generated and business costs
Cash is measured by taking into account the full range of money flowing in and out of a business
A new business may have to pay cash on purchase for all of its supplies until its suppliers trust them enough to provide credit terms (buy now, pay later)
A supplier may then give the business trade credit of 30 or 60 days
This means that the business can receive their stock now and only pay for it in 30 or 60 days - the cash outflow is delayed
As the business sells its products, they receive money generated from the business revenue and this represents a cash inflow
At the end of 60 days they will pay their supplier (cash outflow), but the firm may still have half of its stock available for sale
A profitable business is likely to fail if it does not have sufficient cash
Cash-poor businesses will struggle to pay suppliers, employees and operating expenses
This is called insolvency
E.g. Lifestyle retailer Joules announced plans to liquidate in December 2022 as a result of cash flow difficulties despite making a profit of £2.6 million during the previous year
Calculation & Interpretation of Cash-flow Forecasts
A cash flow forecast is a prediction of the anticipated cash inflows and cash outflows, typically for a three, six or twelve month period
Typical outflows include payments on raw materials, paying staff wages and salaries, paying bills such as electricity
Typical inflows include receipts from sales, money received from a new bank loan, money from the sale of an asset
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 3 Month Cash Flow Forecast (£s)
| Jan | Feb | Mar |
---|---|---|---|
Inflows | |||
Cash received from sales | 4,600 | 5,100 | 3,100 |
Total inflows | 4,600 | 5,100 | 3,100 |
Outflows | |||
Inventory/stock | 1,500 | 850 | 900 |
Wages | 2,200 | 2,200 | 2,200 |
Utilities | 840 | 840 | 840 |
Total outflows | 4,540 | 3,890 | 3940 |
Net cash flow | 60 | 1,210 | (840) |
Opening balance | 500 | 560 | 1770 |
Closing balance | 560 | 1,770 | 930 |
Analysis of the cash flow forecast example
Executive Summary
Overall, this cash flow forecast supports a decision for the business to arrange an overdraft facility with their bank
As sales increase in January and February, inflows are greater than outflows and the business has a positive cash flow
This changes in March as the level of sales falls and the net cash flow turns negative
An overdraft facility will help them survive if their closing balance drops below zero in the next month or two
January
The opening balance of £500 has been introduced by the owner
The business is expected to achieve sales of £4,600
Total outflows are expected to be £4,540
The Net Cash Flow is expected to be £60 (£4,600 - £4,540)
January’s closing balance is expected to be £560(£60 + £500)
February
The closing balance from January becomes the opening balance for February
Sales of £5,100 are expected to be the business total inflows
Total outflows are expected to be £3,890
The net cash flow is expected to be £1,210 (£5,100 - £3,890)
The closing balance is expected to be £1,770 (£1,210 + £560)
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 £3,940
The net cash flow is expected to be -£840 (£3,100 - £3,940)
The closing balance is expected to be £930 (-£840 + £1,770)
Worked Example
The following is an extract from a cash flow forecast
| April | May | June |
---|---|---|---|
| 000s | 000s | 000s |
Cash inflow | 23 | 24 | 30 |
Cash outflow |
| 28 | 81 |
Net cash flow | 10 |
| (51) |
Opening bank balance | 30 | 40 | 36 |
Closing bank balance | 40 | 36 |
|
Fill in the blanks to complete the cash flow forecast. (3)
Step 1: Calculate the cash outflow for April
Net cash flow = inflow - outflow
10,000 = 23,000 - ?
Cash outflow = £13,000 (1 mark)
Step 2: Calculate the net cash flow for May
Net cash flow = inflow - outflow
Net cash flow = £24,000 - £28,000
Net cash flow = - £4,000 (1 mark)
Step 3 - Calculate the closing balance for June
Closing balance = opening balance + net cash flow
Closing balance = £36,000 + - £51,000
Closing balance = - £15,000 (1 mark)
Examiner Tip
When calculating opening and closing balances, work through each month in turn.
Always double-check your calculations in cash flow forecasts as one mistake will have a knock-on effect elsewhere and, in some cases, lead you to make inaccurate judgements.
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