Construct, calculate and interpret cash flow forecasts
Calculating and monitoring cash flow
Creating a cash flow forecast for a new business can be difficult, as the business will have no previous figures to help it estimate its future cash inflows and outflows. This will require the entrepreneur to make some guesses. They will also need to monitor the business’ cash flow carefully to see whether their estimates were realistic, and make changes if not.
An established business can compare its actual cash flow with its cash flow forecast to monitor whether it is achieving its targets. It can then make changes if necessary.
A cashflow forecast required the following elements:
- Revenue and total revenue(cash inflows) – revenue refers to money coming into the business, finding the total means adding all of the forms of revenue together.
- Expenses and total expenses (cash outflows) – expenses are the money leaving the business through costs, finding the total means adding all of the expenses together.
- Net-cash flow - net cash flow is the difference between all cash inflows and all cash outflows of a business: net cash flow = cash inflows – cash outflows.
- Opening balance - the opening balance is the amount of money a business starts with at the beginning of the reporting period, usually the first day of the month: opening balance = closing balance of the previous period.
- Closing balance - the closing balance is the amount of money the business has at the end of the reporting period, usually the last day of the month: closing balance = net cash flow + opening balance.
Cash flow forecast example
The example below demonstrates a business that is predicting higher total inflows each month than total outflows, this is positive. By the end of March the business predicts they will have a closing balance of £10,150. The closing balance does not represent profit, but the amount of cash the business will have.
| Jan | Feb | Mar | |
| Cash inflows | |||
| Sales | £8,500 | £5,000 | £4,000 |
| Rent received | £1,000 | £1,000 | £1,000 |
| Total inflows | £9,500 | £6,000 | £5,000 |
| Cash inflows | |
| Jan | |
| Feb | |
| Mar |
| Sales | |
| Jan | £8,500 |
| Feb | £5,000 |
| Mar | £4,000 |
| Rent received | |
| Jan | £1,000 |
| Feb | £1,000 |
| Mar | £1,000 |
| Total inflows | |
| Jan | £9,500 |
| Feb | £6,000 |
| Mar | £5,000 |
| Jan | Feb | Mar | |
| Cash outflows | |||
| Wages | £1,000 | £800 | £700 |
| Raw materials | £1,000 | £800 | £500 |
| Marketing | £200 | £200 | £200 |
| Rent | £1,500 | £1,500 | £1,500 |
| Loan repayment | £150 | £150 | £150 |
| Total outflows | £3,850 | £3,450 | £3,050 |
| Net cash flow | £5,650 | £2,550 | £1,950 |
| Opening balance | £0 | £5,650 | £8,200 |
| Closing balance | £5,650 | £8,200 | £10,150 |
| Cash outflows | |
| Jan | |
| Feb | |
| Mar |
| Wages | |
| Jan | £1,000 |
| Feb | £800 |
| Mar | £700 |
| Raw materials | |
| Jan | £1,000 |
| Feb | £800 |
| Mar | £500 |
| Marketing | |
| Jan | £200 |
| Feb | £200 |
| Mar | £200 |
| Rent | |
| Jan | £1,500 |
| Feb | £1,500 |
| Mar | £1,500 |
| Loan repayment | |
| Jan | £150 |
| Feb | £150 |
| Mar | £150 |
| Total outflows | |
| Jan | £3,850 |
| Feb | £3,450 |
| Mar | £3,050 |
| Net cash flow | |
| Jan | £5,650 |
| Feb | £2,550 |
| Mar | £1,950 |
| Opening balance | |
| Jan | £0 |
| Feb | £5,650 |
| Mar | £8,200 |
| Closing balance | |
| Jan | £5,650 |
| Feb | £8,200 |
| Mar | £10,150 |
