Cash Flow Forecasts aqa

The purpose of cash flow forecasts

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

  • Cash inflows include income from sales, loan sums received from the bank, interest received or capital injected into a business by owners

  • Cash outflows include payments for stock, staff wages and salaries, rent and utility bills and repayments of bank loans

• A detailed business plan usually includes a cash flow forecast that allows the business owners to identify its financial needs

  • It provides evidence for investors or lenders that finance is required

  • It allows owners or managers to make plans to cover cash shortfalls

• Cash flow forecasts are particularly useful in the following situations:

  • Starting up a business: identifying how much cash is needed in the first few months

  • Running an existing business: recognising where a fall in sales may require use of an overdraft facility

  • Supporting applications for borrowing: determining the size of loan or overdraft needed, when and for how long it is needed and by when it is likely to be fully repaid

  • Managing transactions: identifying how much or how little cash is deposited at the bank can determine when bills should be paid

The structure of cash flow forecasts

• The cash flow forecast structure

  • Compiles expected cash inflows and cash outflows, month by month,

  • Takes into account cash present at the beginning of the period

  • Determines the cash flow position at the end of each month over a period of time

Key terminology

• The opening balance is the cash position at the beginning of each month

  • In the first month, this is usually

    • Cash carried forward from any earlier trading

    • Cash introduced by the owner or from loans received

  • In later months, the opening balance is the closing balance carried forward from the previous month

• The net cash flow is the difference between cash inflows and cash outflows during a month

Calculating net cash flow

• The closing balance is the sum of the month’s net cash flow and the opening balance

  • The closing balance is calculated using the formula

Typical cash flow forecasts

• Although the layout can vary, a typical cash flow forecast includes each of the key elements

A three-month cash flow forecast