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IGCSEBusinessCambridge (CIE)Revision Notes5. Financial Information & Decisions5.2 Cash Flow ForecastCompleting & Interpreting Cash Flow Forecasts

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First teaching 2025

First exams 2027

Completing & Interpreting Cash Flow Forecasts (Cambridge (CIE) IGCSE Business): Revision Note

Exam code: 0450, 0986 & 0264, 0774

Lisa Eades

Written by: Lisa Eades

Reviewed by: Steve Vorster

Updated on

Completing cash flow forecasts

  • A business must first gather information about all cash inflows and cash outflows it expects to encounter over the period

  • The following steps should then be taken to construct the cash flow forecast

Step 1 – Calculate total cash inflows

Cash inflows table for March to May, showing cash from sales and capital introduced, with totals €10,500, €4,800, and €5,300 respectively.

  • In this instance, the business expects to receive cash inflows from sales in March, April and May

  • Owners' capital of €6,000 will be introduced in March

  • The total for each month is calculated by adding cash from sales to capital introduced

Step 2 – Calculate total cash outflows

Cash outflows table for March to May, detailing expenses for rent, stock purchases, wages, and utilities, with total amounts for each month.

  • In this instance, the business expects to pay rent of €1,400 in March, April and May

  • It will purchase a significant amount of stock in March with smaller amounts in April and May

  • Wages are expected to be €2,100 in each month

  • Utilities of €460 will be paid in March and April, increasing to €480 in May

  • Total cash outflows each month is calculated by adding these together

Step 3 – Calculate net cash flows

  • The net cash flow is calculated by subtracting total cash outflows from total cash inflows

Table showing net cash flow, opening, and closing balance for March to May. Balances improve from March's -€260 to May's €500.

  • In March the net cash flow is €10,500 - €10,760 = €(260)

    • Net cash flow is negative as cash outflows are greater than cash inflows

  • In April the net cash flow is €4,800 - €4,560 = €240

  • In May the net cash flow is €5,300 - €4,780 = €520

    • In both months, net cash flow is positive as cash inflows are greater than cash outflows

Step 4 – Calculate opening and closing balances

  • The opening balance is the previous month’s closing balance carried forward

  • The closing balance is calculated by adding the net cash flow to the opening balance

screenshot-2024-04-18-162843

  • In March the opening balance of €0 is added to the net cash flow of €(260) to leave a closing balance of €(260)

  • In April the closing balance from March is carried forward to become its opening balance of €(260) 

  • This opening balance is added to April's net cash flow of €240 to leave a closing balance of €(20)

  • In May the closing balance from April is carried forward to become its opening balance of €(20)

  • This opening balance is added to May's net cash flow of €520 to leave a closing balance of €500

The complete cash flow forecast

Cash flow table for March to May shows inflows, outflows, and balances. March net flow is -€260, April is €240, May is €520 with closing balances.

Worked Example

Here is a simple three-month cash flow forecast for a small seaside café

 

March

April 

May

Cash Inflows

Sales

46,000

54,000

61,000

Cash Outflows

Inventory

13,000

13,000

13,000

Wages

28,000

28,000

 

Miscellaneous

3,500

4,000

4,000

Total Cash Outflows

 

45,000

48,000

Net cash flow

1,500

9,000

 

Opening balance

4,000

5,500

14,500

Closing balance

 

14,500

30,500

Complete the cash flow forecast to show

a. Total cash outflows for March 

b. Closing balance for March 

c. Wages for May

d. Net cash flow for May        

(4)

Step 1: Add all of March's cash outflows to calculate the total

Total space outflows space for space March space equals space 13 comma 000 space plus space 28 comma 000 space plus space 3 comma 500 space equals space 44 comma 500    [1]

Step 2: Add the opening balance to the net cash flow to calculate March's closing balance

Opening space balance space plus space Net space cash space flow space equals space Closing space balance equals space 4 comma 000 space plus space 1 comma 500 space equals space 5 comma 500    [1]

Step 3: Subtract inventory and miscellaneous outflows from total cash outflows to calculate wages

Wages space for space May space equals space 48 comma 000 space minus space 13 comma 000 space minus space 4 comma 000 equals space 31 comma 000    [1]

Step 4: Subtract total cash outflows from total cash inflows to calculate net cash flow

Total space cash space Inflows space minus space Total space cash space outflows space equals space Net space cash space flow equals space 61 comma 000 space minus space 48 comma 000 equals space 13 comma 000    [1]

Examiner Tips and Tricks

Always set out your calculations clearly – show how you worked out inflows, outflows, net cash flow, and balances. Even if your final figure is wrong, you can still gain marks for the working

Interpreting cash flow forecasts

  • Once a cash flow forecast has been constructed, managers may be able to use it to make financial decisions

Cash flow table for March to May shows inflows, outflows, and balances. March net flow is -€260, April is €240, May is €520 with closing balances.

  • Overall, this cash flow forecast supports an application for the business to borrow £6,000 in March to cover the initial low inflows, significant outflows and negative net cash flow

  • It may also arrange a short-term overdraft to cover negative closing balances in March and April

  • Healthy sales mean that from May, inflows are greater than outflows and the business has a positive net cash flow

Overcoming cash flow problems

  • The cash flow forecast example above identifies a cash flow problem in March and April where the closing balance is negative

  • It has a range of ways to solve this issue to prevent insolvency

    • The most suitable method may be to arrange a flexible, short-term overdraft facility with its bank

Ways to solve cash flow problems

Method

Explanation

Reduce the credit period offered to customers

  • Collecting money owed from customers more quickly

    • However, customers may move to competing businesses that offer better credit terms

Ask suppliers for an extended repayment period e.g an extension from 60 to 90 days

  • The business can use cash it would have paid to suppliers for other purposes

  • Suppliers may be unwilling to extend credit terms

Make use of overdraft facilities or short-term loans

  • The business can spend more money than it has in its bank account

  • Banks may be reluctant to lend to businesses with cash-flow problems

Sell off excess stock

  • Less liquid current assets will be converted into cash

  • Storage and security costs may also be reduced

  • Stock may need to be sold at a low price to attract sales

Sell assets and lease fixed assets instead

  • The business will continue to have the use of assets but must make regular payments to the leasing company

Introduce new capital and reduce drawings from the business

  • New capital may be introduced by the owner or from additional investors

  • This may result in the dilution of control of the business

  • A business can also have too much cash

    • If it holds large amounts of cash, it may miss out on the benefits of investing it in fixed assets or savings

    • This may represent a significant opportunity cost, especially when interest rates are high

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    Author
    Reviewer
    Lisa Eades

    Author: Lisa Eades

    Expertise: Business Content Creator

    Lisa has taught A Level, GCSE, BTEC and IBDP Business for over 20 years and is a senior Examiner for Edexcel. Lisa has been a successful Head of Department in Kent and has offered private Business tuition to students across the UK. Lisa loves to create imaginative and accessible resources which engage learners and build their passion for the subject.

    Steve Vorster

    Reviewer: Steve Vorster

    Expertise: Economics & Business Subject Lead

    Steve has taught A Level, GCSE, IGCSE Business and Economics - as well as IBDP Economics and Business Management. He is an IBDP Examiner and IGCSE textbook author. His students regularly achieve 90-100% in their final exams. Steve has been the Assistant Head of Sixth Form for a school in Devon, and Head of Economics at the world's largest International school in Singapore. He loves to create resources which speed up student learning and are easily accessible by all.