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5.2. Cash flow forecast

Syllabus
0264–2027–2028
Topic
5.2
Level
—

Learning objectives

5.2.1The importance of cash and cash flow forecasts• why cash is important to a business• what a cash flow forecast is and why it is important• main features of a cash flow forecast: cash inflow, cash outflow, net cash flow, opening balance, closing balance• amend or complete a simple cash flow forecast• interpret a simple cash flow forecast• how a short-term cash flow problem may be overcome: overdraft, delaying supplier payments, asking customers to pay more quickly, delay purchase of non-current assets Note: candidates will not be assessed on constructing a cash flow forecast.

Reading and repairing a cash flow forecast

Cash lets a business pay wages, suppliers and other bills when they fall due. A cash flow forecast is an estimate of future cash entering and leaving the business over time. It helps managers anticipate a shortage, plan payments and finance, test a decision and set targets before the cash movement happens.

Forecast feature Meaning
cash inflow cash received, such as cash sales or customer payments
cash outflow cash paid, such as wages, suppliers, rent or equipment
net cash flow inflow minus outflow for that period; it is negative when outflow is greater
opening balance cash available at the start of the period; normally the previous period's closing balance
closing balance opening balance plus net cash flow; it becomes the next period's opening balance

\text{net cash flow}=\text{cash inflow}-\text{cash outflow}\text{closing balance}=\text{opening balance}+\text{net cash flow}

Worked amendment: if month 3 inflow is revised to 1,500andoutflowis1,500 and outflow is1,200, net cash flow becomes 300.Withanopeningbalanceof−300. With an opening balance of −1,200, the revised closing balance is −$900. Carry the sign carefully: a negative closing balance signals a forecast cash shortage, even if the business may be profitable over a different period.

Short-term response Immediate cash-flow effect Important cost or risk
use an overdraft permits a temporary negative bank balance interest and limits apply
delay supplier payments keeps cash in the business longer may lose discounts or damage supplier trust
ask customers to pay sooner brings inflow forward; a discount may encourage prompt payment the discount reduces revenue per sale or stricter terms may deter customers
delay buying non-current assets postpones a large outflow old equipment or delayed expansion may reduce efficiency or growth

A forecast is an estimate, not a guarantee, so revise it when assumptions change. Completing or amending given rows and interpreting their effect is required; constructing an entire forecast from a blank page is outside this syllabus. Cash is also not the same as profit: a profitable business can still fail if it cannot pay bills on time.