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5.3 Forecasting and managing cash flows

Syllabus
9609–2026–2027
Topic
5.3
Level
AS

A cash-flow forecast carries each expected cash balance into the next period

A cash-flow forecast estimates future cash receipts (inflows), cash payments (outflows) and resulting balances over stated periods. It models liquidity and timing—not accounting profit—and should expose assumptions about amount and payment/receipt dates.

Net cash flow=total cash inflows−total cash outflows\text{Net cash flow}=\text{total cash inflows}-\text{total cash outflows}

Closing balance=opening balance+net cash flow\text{Closing balance}=\text{opening balance}+\text{net cash flow}

Next period’s opening balance=current period’s closing balance\text{Next period's opening balance}=\text{current period's closing balance}

January opens with 5,000,receives5,000, receives18,000 and pays 21,000:netcashflow=−21,000: net cash flow = −3,000 and closing balance = 2,000.Februarythereforeopensat2,000. February therefore opens at2,000. A negative net flow can still leave a positive closing balance; a negative closing balance is the forecast funding shortage.

Purpose Decision enabled
Identify timing/size of shortages and surpluses Arrange only the required overdraft/loan, invest surplus or reschedule activity before bills are missed
Plan wages, suppliers, tax, inventory, equipment and expansion Protect continuity and choose when spending is affordable
Monitor receivables/payables and compare actual with forecast Chase late customers, renegotiate terms and update assumptions/control
Support business plans and lender/investor discussion Demonstrate expected funding need and repayment timing—while allowing stakeholders to challenge assumptions

To amend a forecast: (1) place the changed receipt/payment in the period cash actually moves, (2) recalculate that period's total inflow/outflow and net flow, (3) recalculate its closing balance, (4) carry that revised closing balance through every later opening/closing balance, and (5) interpret the new shortage/surplus and action. Do not change profit entries that are not cash movements.

Improve/bridge cash flow How it changes timing Main trade-off
Shorten customer credit, collect faster, early-payment discount or factoring Receipts arrive earlier Sales/discount/factor fee and customer relationship
Negotiate supplier credit/delay payment within terms Payments move later Lost discount, trust/supply or penalty risk
Reduce excess inventory/costs, improve productivity or increase cash sales/revenue Releases cash or strengthens recurring operating flow Stockout, service/quality, demand and implementation risk
Delay capital spending, lease instead of buy, sell assets/sale-and-leaseback Avoids/spreads large near-term outflow or injects cash Future capacity, recurring lease and ownership loss
Overdraft/short loan, owner capital or equity Adds finance before shortage Interest/repayment, security or control dilution; may only bridge—not solve—the cause

A forecast is conditional, not a promise: update it against actuals and test optimistic assumptions. Borrowing improves the cash balance immediately but does not by itself improve sales, margin, receivable collection or long-run cash generation.