Interpreting Cash Flow Forecasts

Reading a cash flow forecast

A cash flow forecast predicts the money a business expects to flow in and out over the coming months. Firms build one to see cash shortages before they arrive and to support a request for a loan. You will not have to construct a whole forecast, but you must read and complete its sections. Cash inflows are the money coming in, such as sales and loans. Cash outflows are the money going out, such as wages, rent and stock. The net cash flow for a month is the inflows minus the outflows. The opening balance is the cash the business starts the month with, and the closing balance is the opening balance plus the net cash flow. A closing balance below zero is a red flag. This module shows how to read and complete these figures.

Forecast words

Learn these before you read any forecast, and keep the order inflows, outflows, net, balance in mind.

Inflows against outflows

A forecast splits the money into two columns, and telling them apart is the first skill.

How to complete a section

Work a forecast column in a fixed order. First total everything the firm receives, then total everything it spends. Take the spending away from the receipts to get the net figure for the month. Add that net figure to the balance the firm began the month with, and you have the balance it ends on, which becomes the start of the next month. If that end figure falls below zero, the forecast is warning that the firm will run short of cash.

Match the forecast term to its meaning

Work out the closing balance

A firm starts a month with an opening balance of 2000 pounds and has a net cash flow of 3000 pounds that month. What is its closing balance?

• 5000 pounds.
• 1000 pounds.
• 3000 pounds.
• 2000 pounds.

Why forecast cash flow

Select the TWO real reasons a business makes a cash flow forecast.

• To spot a cash shortage before it happens
• To support a request for a bank loan
• To guarantee the business makes a profit
• To avoid ever having to sell anything

Net cash flow

In one month a firm has cash inflows of 8000 pounds and cash outflows of 5000 pounds. Subtract to find the net cash flow for the month, in pounds.

Order completing a forecast row

Put the steps of completing a month in a cash flow forecast in order, earliest first.

• Add up all the cash inflows
• Add up all the cash outflows
• Subtract outflows from inflows for the net cash flow
• Add the net cash flow to the opening balance for the closing balance

Complete the facts

Money coming into a business is a cash _____. Money going out is a cash _____. Inflows minus outflows in a month gives the _____ cash flow. The cash a business is left with at the end of the month is the _____ balance.

Match the task to what you do

Spot the true forecast facts

Tap the TWO statements that are true about a cash flow forecast.

• Net cash flow is inflows minus outflows
• A negative closing balance warns of a cash shortage
• A forecast is the same as a profit calculation
• Students must build a whole forecast from nothing

Read the forecast

Read each case and choose the best response, with a reason.

• A month shows inflows of 6000 pounds and outflows of 9000 pounds. What is the net cash flow, and what does it signal?
• A forecast shows the closing balance turning negative in three months time. How is this useful to the firm?
• A student adds the outflows to the inflows to get the net cash flow. What have they done wrong?

Interpret a cash flow forecast

A shop owner has a cash flow forecast showing the closing balance falling and turning negative in two months. Explain how to read the forecast and what it is telling the owner.

• Explain what cash inflows and cash outflows are
• Explain how net cash flow is calculated
• Explain how the closing balance is worked out from the opening balance
• Explain what a negative closing balance warns the owner about
• Finish with a judgement on why a forecast is useful even though it is only a prediction