3.2 Cash flow forecasting

3.2.1 The importance of cash to a business

Uses of cash to a business:

• To pay suppliers, overheads and employees - Cash is required daily in order to cover certain expenses.

• To prevent business failure (insolvency) - Without cash, a business may be unable to meet its financial obligations and therefore would be unable to pay debts.

The difference between cash and profit - Cash is the actual money a business has, whereas profit is the financial gain after total costs are deducted from revenue.

3.2.2 Calculation and interpretation of cash-flow forecasts

Cash flow forecast - A financial document that estimates the expected cash inflows and outflows of a business over a specific period of time.

Key terms

• Cash inflow - All money coming into a business (sales, investments, loans).

• Cash outflow - All money leaving a business (rent, wages, supplies).

• Net cash flow - The difference between cash inflows and cash outflows over a given period.

  • Formula: Net Cash Flow = Cash Inflows - Cash Outflows

• Opening balance - The amount of cash a business has at the start of a period (usually a month).

• Closing balance - The amount of cash a business has at the end of a period (usually a month).

  • Formula: Closing Balance = Opening Balance + Net Cash Flow