3.2 Cash flow forecasting
- Syllabus
- 2026
- Topic
- 3.2
- Level
- —
Learning objectives
3.2.1Importance of cash to a businessThe importance of cash to a business:• to pay suppliers, overheads and employees• to prevent business failure (insolvency)• the difference between cash and profit.3.2.2Calculating and interpreting cash-flow forecastsCalculate and interpret cash-flow forecasts: cash inflows, cash outflows, total revenue, total costs, net cash flow, and opening and closing balances.
Separate cash availability from profit
Cash is money available to make payments now; profit is revenue minus costs for a period. A business needs enough cash at the right time even when its accounts show a profit.
| Situation | Profit effect | Cash timing effect |
|---|---|---|
| sale made on credit | revenue and possible profit may be recorded | no customer cash arrives until payment is collected |
| inventory/equipment bought for cash | cost or asset treatment affects profit according to accounting rules | cash leaves immediately |
| bank loan received | not sales revenue or profit | cash rises now, but future interest/repayment creates outflows |
| owner/shareholder distribution or prior debt payment | may not be a current operating cost | cash leaves the business |
Cash pays suppliers, overheads and employees. If the business cannot meet debts when due, operations or supplies may stop, employees may leave and creditors can take action. Persistent inability to meet obligations can make the business insolvent and cause failure.
A cash-flow forecast estimates future inflows, outflows and balances so managers can identify a shortage early, arrange suitable finance, change payment timing or reconsider spending. It supports planning but does not guarantee the forecast will occur.
A profitable business can become insolvent when receipts arrive after bills fall due. A cash-rich business is not necessarily profitable if its cash came from borrowing or owner investment.
Calculate and interpret a cash-flow forecast
Cash inflows are receipts such as cash sales, collected customer payments or finance received. Cash outflows are payments such as suppliers, wages, overheads, equipment and repayments. Add every relevant row before calculating the period totals.
totalcashinflow=sumofcashinflowrows;totalcashoutflow=sumofcashoutflowrows;netcashflow=totalcashinflow−totalcashoutflow;closingbalance=openingbalance+netcashflow
| February (£) | Amount | Calculation/meaning |
|---|---|---|
| opening balance | 4,000 | cash available at the start |
| total cash inflow | 7,000 | receipts during February |
| total cash outflow | 3,000 | payments during February |
| net cash flow | 4,000 | 7,000 - 3,000 |
| closing balance | 8,000 | 4,000 + 4,000 |
The closing balance of one period becomes the next period's opening balance. To find a missing value, rearrange the same relationships; preserve the sign and currency/unit throughout.
Negative net cash flow means outflows exceed inflows in that period, but a positive opening balance may still leave a positive closing balance. A negative closing balance signals a forecast cash shortage. Managers can test changes to receipts, payment timing, costs or finance and consider their wider consequences.
Forecasts depend on estimates of sales, customer-payment timing, costs and unexpected events. Compare forecast with actual cash flow and update assumptions; a spreadsheet that balances mathematically can still be commercially unrealistic.
Do not add the opening balance when calculating net cash flow: it is brought forward from before the period. Revenue/cost figures belong in the forecast only when the related cash is expected to be received or paid in that period.