Cash Flow Forecasting (OCR GCSE Business)

Completing Cash Flow Forecasts

• A cash flow forecast is a prediction of the anticipated cash inflows and outflows, usually for a six- to twelve-month period

• The cash flow forecast:

  • Compiles expected cash inflows and cash outflows, month by month,

  • Takes into account cash present at the beginning of the period

  • Determines the cash flow position at the end of each month over a period of time

Key Terminology

Completing a cash flow forecast

• Although the layout can vary, a typical cash flow forecast can be constructed in the following way:

Step 1: Calculate total cash inflows

Explanation

• In this instance, the business expects to receive cash inflows from sales in March, April and May

• Owners' capital of €6,000 will be introduced in March

• The total for each month is calculated by adding cash from sales to capital introduced

Step 2: Calculate total cash outflows

Explanation

• In this instance, the business expects to pay rent of €1,400 in March, April and May

• It will purchase a significant amount of stock in March, with smaller amounts in April and May

• Wages are expected to be €2,100 in each month

• Utilities of €460 will be paid in March and April, increasing to €480 in May

• Total cash outflows each month is calculated by adding these together

Step 3: Calculate net cash flows

• The net cash flow is calculated by subtracting total cash outflows from total cash inflows

Explanation

• In March the net cash flow is €10,500 - €10,760 = €(260)

  • Net cash flow is negative as cash outflows are greater than cash inflows

• In April the net cash flow is €4,800 - €4,560 = €240

• In May the net cash flow is €5,300 - €4,780 = €520

  • In both months, net cash flow is positive as cash inflows are greater than cash outflows

Step 4: Calculate opening and closing balances

• 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

Explanation

• In March the opening balance of €0 is added to the net cash flow of €(260) to leave a closing balance of €(260)

• In April the closing balance from March is carried forward to become its opening balance of €(260) 

• This opening balance is added to April's net cash flow of €240 to leave a closing balance of €(20)

• In May the closing balance from April is carried forward to become its opening balance of €(20)

• This opening balance is added to May's net cash flow of €520 to leave a closing balance of €500

Diagram: A complete cash flow forecast

Explanation

• Overall, this cash flow forecast shows low cash inflows and significant outflows initially, which lead to negative net cash flow in March and April

  • During these months, the business may make arrangements to use an overdraft facility to ensure it can pay suppliers and staff

  • It may be able to negotiate delaying payments to suppliers until the cash flow position improves or take steps to reduce costs

• Healthy sales mean that from April on, inflows are greater than outflows and the business has a positive net cash flow

  • At this points, the business may make arrangements to invest excess cash in a savings account or use it to expand its operations

Making Decisions Using Cash Flow Forecasts

• The cash flow forecast example above identifies a cash flow problem in March and April where the closing balance is negative

• Business managers or owners can use this information to make decisions to solve cash flow problems and prevent insolvency

Options to Solve Cash Flow Problems