Interpreting Cash Flow Forecasts (Edexcel IGCSE Business)

Identifying cash flow Problems

• Drawing up a cash flow forecast helps a business to identify cash flow problems

  • Identify periods of cash shortfalls

  • Recognise where there is a significant excess of cash
    
    

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 £4,000 in January to cover the initial low inflows, significant outflows and negative net cash flow

• During April and May, the closing balance is negative

• As sales increase from June, inflows are greater than outflows, and the business has a positive cash flow

January

• The cash flow forecast assumes that the bank approves a £4,000 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 £6,600 (£2,600 + £4,000)

• Total outflows are expected to be £4,570

• The Net Cash Flow is expected to be £2,030 (£6,600 - £4,570)

• January’s closing balance is expected to be £2,530 (£2,030 + £500)

February

• The closing balance from January becomes the opening balance for February

• Sales of £2,800 are expected to be the total inflows 

• Total outflows are expected to be £4,214 

• The Net Cash Flow is expected to be -£1,414 (£2,800 - £4,214) 

• The closing balance is expected to be £1,116 (-£1,414 + £2,530) 

June

• The closing balance from May becomes the opening balance for June

• Sales of £5,000 are the total inflows 

• Total outflows are expected to be £4,606

• The Net Cash Flow turns positive and is expected to be £394 (£5,000-£4,606) 

• The closing balance is expected to be £174 (£-220 + £394) 

Strategies to Improve Cash Flow

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

• It has a range of ways to solve this issue to prevent insolvency

  • The most suitable method may be to arrange a flexible, short-term overdraft facility with its bank

Ways to solve cash flow problems

• A business can also have too much cash

  • If it holds large amounts of cash, it may miss out on the benefits of investing it in fixed assets or savings

  • This may represent a significant opportunity cost especially when interest rates are high