Using a cashflow
forecast
.
3 20
What is ‘cashflow’?

The flows of money into and out of the business

Money flows in through revenue from sales of
service or product

Money flows out when wages and expenses are
paid or stocks are purchased.
3.20 Using a cashflow forecast
The principle of cashflow 1
 More money IN than OUT = cashflow positive.
BUT high surplus of cash should be avoided in
non-interest bearing account)
 More money OUT than IN = cashflow
negative. Can mean shortage of cash to
pay bills
AIM is to have a positive cashflow or at
least a balance.
3.20 Using a cashflow forecast
The principle of cash flow
Cash too high
Revenue
in
Cash OK
Expenses
out
Cash too low
3.20 Using a cashflow forecast
Inflows
Inflows = money received from
 Customers
 Local and national government grants
 Sale of property or equipment
 Loans
3.20 Using a cashflow forecast
Outflows
Outflows = money spent by the business on







Wages and salaries for staff
Raw materials or stock
Gas, electricity, water and telephone
Rent and business rates
Interest on loans
VAT
Equipment purchases
3.20 Using a cashflow forecast
Cashflow forecasts
Cashflow forecasts are prepared when:
 A new product or service is planned
 New resources (eg new machinery) is
being bought
 A major sales campaign is planned
 There will be a large increase in existing
activities, eg making or selling many more
products
3.20 Using a cashflow forecast
A basic cashflow diagram
Jan
Feb
Mar
Apr
May
June
£
£
£
£
£
£
Opening
balance
5,000
7,000
4,000
6,000
12,000
15,000
Add
inflows
20,000 22,000
18,000
20,000 23,000
18,000
Total
25,000 29,000
22,000
26,000 35,000
33,000
Less
18,000 25,000
outflows
16,000
14,000 20,000
33,000
Closing
balance
6,000
12,000 15,000
0
7,000
4,000
3.20 Using a cashflow forecast
A full cashflow forecast
See page 341 in Student Handbook.
A = sum of numbers under the inflow heading
B = sum of numbers under the outflow heading
C = difference between A and B, called net
cashflow
D = balance of money in bank at the start of the
month
E = adjusted bank balance after adding or
subtracting the net cashflow figure
3.20 Using a cashflow forecast
Computers and cashflow 1
Spreadsheet packages are ideal for cashflow
forecasts because:
 Once the data and formulae have been
entered, the calculations can be done quickly
and accurately
 ‘What if’ calculations can be carried out swiftly
 Alterations to data can be made quickly and
recalculations done automatically
3.20 Using a cashflow forecast
Computers and cashflow 2
Potential problems with using a computer are:
 Incorrect data or formulae will lead to wrong
conclusions
 Spreadsheets take time to set up
 Computer data can be lost or corrupted
3.20 Using a cashflow forecast