Calculating Cash Flow Forecasts (Edexcel IGCSE Business)

Introduction to cash flow Forecasts

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

• A business plan should include a cash flow forecast

  • Business owners can identify its financial needs

  • Lenders such as banks can determine whether loans are capable of being repaid

The Uses & Limitations of Cash Flow Forecasts

Constructing a cash flow Forecast

• A business must first gather information about all cash inflows and cash outflows it expects to encounter over the period

• The following steps should then be taken to construct the cash flow forecast

Step 1 - Calculate total cash inflows

• 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 to show the Complete cash flow Forecast

Analysis of the cash flow forecast example

• Overall, this cash flow forecast supports an application for the business to borrow £6,000 in January to cover the initial low inflows, significant outflows and negative net cash flow

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