1. Cash flow forecasts

2. Cash flow forecasts This section covers the following:
What a cash flow forecast is
Successful cash flow forecasts
The importance of cash flow forecasts
Negative cash flow

3. Key words
Cash flow forecast
Estimating the likely flows of cash over the coming months and, therefore, the overall state of one’s bank balance

4. What is a cash flow forecast?
Cash flow is the difference between cash coming in and out of a business over a period of time.
Cash flow forecasting is where a business attempts to predict the amount of cash coming into and out of the business over a period of time.
Successful cash flow forecasts need accurate predictions of costs and revenue, e.g. staff costs, new buildings, number of sales.
The longer the forecast, the harder it is to be accurate.
Mistakes can result in a negative cash flow, one where cash coming into the business is less than that going out.
If the negative cash flow is unplanned it could lead to problems with investors like banks.

5. Key words Closing balance
The amount of cash left in the bank at the end of the month
Negative cash flow
When cash outflows are greater than cash inflows
Net cash flow
Cash in minus cash out over the course of a month.
Opening balance
The amount of cash in the bank at the start of the month

6. An example of a cash flow forecast
Look at the cash flow forecast for a new nightclub for 6 months.
£250,000 was invested in the business in August – this is the opening balance.
Cash outflows are deducted from cash inflows, leaving a net cash flow, i.e. –£185,000 in August.
The net cash flow is then deducted from the opening balance, i.e. £65,000.
Which is the first month the nightclub has a positive cash flow forecast?
Figures in £000s
August
September
October
November
December
January
Opening balance
250 65
-10 10 15 45
Cash inflows 85
115 55
Cash outflows
185 75 60
Net cash flow
–185
–75 5 30 –5
Closing balance
–10 35 40

7. Why are cash flow forecasts important?
They identify potential shortfalls in cash in advance.
Businesses can see if they can afford to pay suppliers and employees.
They can spot problems with customer payments, e.g. can the business afford to allow a lot of time to pay.
They allow investors such as banks to see that the business will be able to pay its debts.
Cash flow forecasts are particularly important for new and fast growing businesses.
Why would a cash flow forecast be very important for a fireworks factory?

8. Summary questions
Write down or discuss the answers to these questions.
What is a cash flow forecast?
Give one reason why it is important to a business.
Why might a cash flow forecast be less accurate over 12 months rather than just 1 month?
Give one reason why a shop may have a negative cash flow.
Why might a bank be interested in a cash flow forecast?