Cash Flow Forecasts – Unit 3: Investigating
Financial Control
3.3 Cash Flow Forecasts
Unit 3: Investigating Financial Control
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Contents
For more detailed instructions, see the Getting Started presentation
Flash activity (these activities are not editable)
Teacher’s notes included in the Notes Page
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Key skills
Sound
Printable activity
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Cash balances
In this section you will consider
cash balances and learn what
constitutes a positive cash flow.
Opening and closing balance
Income per period
Expenditure per period
The implications of negative cash flow
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Opening and closing balances
The cash balance summarizes the amount of money left in a
business’s bank account at the end of a specific period.
It is often the most important part of a cash flow forecast –
and the one which financial managers will examine first.
The opening balance is the
cash balance from the month
before. This is the money
available to a business at the
start of the specified period.
The closing balance is the difference between income and
expenditure. It is the money available to a business at the
end of the specified period, after all bills have been paid.
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Net cash flow
Net cash flow is the difference between the income per
period and the expenditure per period.
The income per period is all the cash inflows
which happen within a specific period.
The expenditure per period is all the cash
outflows which happen within a specific period.
Net cash flow is simple to calculate.
For example, Cherry Pearson owns a clothes shop.
In May she receives various payments totalling £15,000.
She also makes a number of payments, which come
to £13,500.
What is Cherry’s net cash flow for May?
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Positive and negative cash flows
If a business’s net cash flow is positive, then its cash flow for
that period can be described as a positive cash flow.
Why do you think this is?
However, if the net cash flow is negative, this is described as
a negative cash flow.
Cherry’s net cash flow in May was £1,500.
Was her cash flow positive or negative?
In June, Cherry’s total income is £13,000
and her total expenditure is £14,000.
What is Cherry’s net cash flow for June?
Is it a positive or negative cash flow?
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Positive and negative cash flows
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Consequences of negative cash flow
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Planning ahead
Ideally, there will always be more money coming into a
business than going out. However, income and expenses
often occur at different times, particularly for seasonal
businesses like seaside attractions.
Some payments can be
arranged to suit a business,
but many outgoings, for
example, salaries and tax,
must be paid on fixed dates.
Cash flow forecasts allow a business
to identify when it is likely to have a negative cash flow, so
that it can take action to avoid or deal with the situation.
What other solutions for managing or avoiding
a deficit can you think of?
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Assignment: Seasonal businesses
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Case study: Muddy Spuds
Muddy Spuds
Ben Matthews is creating a cash
flow forecast for his potato farming
business, Muddy Spuds.
He plants the potatoes in March.
The potatoes are harvested in
September. Ben then sells them to
the wholesaler and receives payment.
Between March and September he
has to pay for fertilizers, diesel for
the farm vehicles, etc.
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Assignment: Muddy Spuds
Muddy Spuds
What cash flow problems would Ben Matthews face if:
the potato harvest was delayed until early October?
Ben had to pay the bill
for the fertilizer in April?
Ben had to employ extra
workers to help him to
harvest his crops?
How would creating a cash flow forecast for Muddy
Spuds help Ben to manage his finances?
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