Cash & Cash Flow Forecasts (Edexcel GCSE Business)

Revision Note

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Lisa Eades

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 Tips and Tricks

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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Lisa Eades

Author: Lisa Eades

Expertise: Business Content Creator

Lisa has taught A Level, GCSE, BTEC and IBDP Business for over 20 years and is a senior Examiner for Edexcel. Lisa has been a successful Head of Department in Kent and has offered private Business tuition to students across the UK. Lisa loves to create imaginative and accessible resources which engage learners and build their passion for the subject.

Steve Vorster

Author: Steve Vorster

Expertise: Economics & Business Subject Lead

Steve has taught A Level, GCSE, IGCSE Business and Economics - as well as IBDP Economics and Business Management. He is an IBDP Examiner and IGCSE textbook author. His students regularly achieve 90-100% in their final exams. Steve has been the Assistant Head of Sixth Form for a school in Devon, and Head of Economics at the world's largest International school in Singapore. He loves to create resources which speed up student learning and are easily accessible by all.