Cash Flow Forecasts (AQA AS Business): Revision Note
Exam code: 7131
The value of cash flow forecasting
Cash flow forecasts provide insights into the expected inflows and outflows of cash over a specific period
By analysing these forecasts over time, businesses can better plan and allocate financial resources
Uses and limitations of cash flow forecasts
Uses | Limitations |
|---|---|
|
|
Constructing cash flow forecasts
Key terminology associated with cash flow forecasts
Term | Definition |
|---|---|
Cash inflow |
|
Cash outflow |
|
Net cash flow |
|
Opening balance |
|
Closing balance |
|
An example six-month cash flow forecast
| Jan | Feb | Mar | Apr | May | Jun |
|---|---|---|---|---|---|---|
Opening balance | 500 | 4,330 | 2,716 | 1,292 | 816 | 640 |
Cash inflows | ||||||
Cash received from sales | 2,600 | 2,800 | 3,100 | 4,600 | 4,800 | 5,200 |
Capital introduced | 6,000 | 0 | 0 | 0 | 0 | 0 |
Total inflows | 8,600 | 2,800 | 3,100 | 4,600 | 4,800 | 5,200 |
Cash outflows | ||||||
Inventory | 1,500 | 850 | 950 | 1,300 | 1,350 | 1,400 |
Wages | 2,200 | 2,200 | 2,200 | 2,200 | 2,200 | 2,200 |
Utilities | 840 | 840 | 840 | 882 | 882 | 882 |
Loan repayments | 0 | 284 | 284 | 284 | 284 | 284 |
Miscellaneous | 230 | 240 | 250 | 410 | 260 | 260 |
Total outflows | 4,770 | 4,414 | 4,524 | 5,076 | 4,976 | 5,026 |
Net cash flow | 3,830 | (1,614) | (1,424) | (476) | (176) | 174 |
Closing balance | 4,330 | 2,716 | 1,292 | 816 | 640 | 814 |
Analysis of the cash flow forecast example
Executive summary
Overall, this cash flow forecast supports an application for the business to borrow £6,000 in January to cover the initial low inflows, significant outflows and negative net cash flow
As sales increase from June, inflows are greater than outflows, and the business has a positive cash flow
Should a loan be approved, the business will require any short-term sources of finance, such as overdraft facilities
January
The cash flow forecast assumes that the bank approves a £6,000 loan in January (capital introduced)
The owner has introduced an opening balance of £500
The business is expected to achieve sales of £2,600
Total inflows are therefore expected to be £8,600 (£2,600 + £6,000)
Total outflows are expected to be £4,770
The net cash flow is expected to be £3,830 (£8,600 - £4,770)
January’s closing balance is expected to be £4,330 (£3,830 + £500)
February
The closing balance from January becomes the opening balance for February
Sales of £2,800 are expected to be the business total inflows
Total outflows are expected to be £4,414
The net cash flow is expected to be -£1,614 (£2,800 - £4,414)
The closing balance is expected to be £2,716 (-£1,614 + £4,430)
March
The closing balance from February becomes the opening balance for March
The business expects to achieve sales of £3,100 as its total inflows
Total outflows are expected to be £4,524
The net cash flow is expected to be -£1,424 (£3,100 - £4,524)
The closing balance is expected to be £1,292 (-£1,424 + £2,716)
April
The closing balance from March becomes the opening balance for April
Sales of £4,600 are expected as the businesses total inflows
Total outflows are expected to be £5,076
The net cash flow is expected to be -£476 (£4,600 - £5,076)
The closing balance is expected to be £816 (-£476 + £1,292)
May
The closing balance from April becomes the opening balance for May
The business expects to achieve sales of £4,800 as its total inflows
Total outflows are expected to be £4,976
The net cash flow is expected to be -£176 (£4,800 - £4,976)
The closing balance is expected to be £640 (-£176 + £816)
June
The closing balance from May becomes the opening balance for June
Sales of £5,200 are the business total inflows
Total outflows are expected to be £5,026
The net cash flow is expected to be £174 (£5,200 - £5,026)
The closing balance is expected to be £814 (£174 + £640)
Worked Example
Here is a simple three-month cash flow forecast for a small seaside café
| March | April | May |
|---|---|---|---|
Inflows | |||
Sales | 46,000 | 54,000 | 61,000 |
Outflows | |||
Inventory | 13,000 | 13,000 | 13,000 |
Wages | 28,000 | 28,000 | 28,000 |
Miscellaneous | 3,500 | 4,000 | 4,000 |
Total outflows | 44,500 | 45,000 | 45,000 |
Net cash flow | 1,500 | 9,000 | 16,000 |
Opening balance | 4,000 | 5,500 | 14,500 |
Closing balance | 5,500 | 14,500 | 30,500 |
The café owner thinks that good weather will increase the volume of customers and decides to appoint another full-time assistant in March. As a result, wages increase to an expected £31,000 per month
Calculate the closing balances in the cash flow forecast resulting from the changes above
[4]
Answer:
Step 1: Insert the value of the new wages into the relevant space for each month
| March | April | May |
|---|---|---|---|
Wages | 31,000 | 31,000 | 31,000 |
Step 2: Calculate the new total outflows for each month, and insert them into the relevant space for each month
March: £13,000 + £31,000 + £3,500 = 47,500
April: £13,000 + £31,000 + £4,000 = 48,000 (1)
May: £13,000 + £31,000 + £4,000 = 48,000
| March | April | May |
|---|---|---|---|
Total outflows | 47,500 | 48.000 | 48,000 |
Step 3: Calculate the new net cash flow for each month, and insert it into the relevant space for each month
March: £46,000 - £47,500 = -£1,500
April: £54,000 - £48,000 = £6,000 (1)
May: £61,000 - £48,000 = £13,000
| March | April | May |
|---|---|---|---|
Net cash flow | (1,500) | 6,000 | 13,000 |
Step 4: Calculate and insert the new closing balances for March, April and May, and carry March and April forward as opening balances for subsequent months
March = £4,000 + - £1,500 = £2,500
April = £2,500 + £6,000 = £8,500 (1)
May = £8,500 + £13,000 = £21,500
| March | April | May |
|---|---|---|---|
Inflows | |||
Sales | 46,000 | 54,000 | 61,000 |
Outflows | |||
Inventory | 13,000 | 13,000 | 13,000 |
Wages | 31,000 | 31,000 | 31,000 |
Miscellaneous | 3,500 | 4,000 | 4,000 |
Total Outflows | 47,500 | 48.000 | 48,000 |
Net cash flow | (1,500) | 6,000 | 13,000 |
Opening balance | 4,000 | 2,500 | 8,500 |
Closing balance | 2,500 | 8,500 | 21,500 (1) |
Note that this one change in the anticipated cost of wages impacts four other variables: 1. total outflows, 2. net cash flow, 3. opening balance (except March) and 4. closing balance
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