IGCSE Business Studies - 5.2.1 The Importance of Cash and Cash Flow Forecasts

Objective: Amend or complete a simple cash flow forecast

Why is Cash Important for a Business?

Cash is the lifeblood of any business. It's the money a business receives from sales and other sources, and the money it spends on its operations. Without sufficient cash, a business cannot pay its bills, employees, suppliers, or invest in future growth. A healthy cash flow is essential for survival and success.

Key uses of cash include:

• Paying for day-to-day expenses (rent, utilities, salaries)
• Purchasing stock/inventory
• Repaying debts (loans, credit)
• Investing in new equipment or expansion
• Funding marketing campaigns

What is a Cash Flow Forecast?

A cash flow forecast is a prediction of a business's expected cash inflows (money coming in) and cash outflows (money going out) over a specific period – usually a month, quarter, or year. It helps businesses anticipate potential cash surpluses or deficits.

A good cash flow forecast allows a business to:

• Identify potential cash shortages in advance.
• Plan for financing needs (e.g., loans).
• Make informed decisions about spending and investment.
• Manage working capital effectively.
• Assess the viability of new projects.

Components of a Cash Flow Forecast

A basic cash flow forecast typically includes the following:

• Cash Inflows: Money coming into the business. Examples include:
• Sales Revenue
• Receipts from customers
• Interest received
• Sale of assets
• Cash Outflows: Money leaving the business. Examples include:
• Payment to suppliers
• Payment of wages and salaries
• Rent
• Utilities (electricity, gas, water)
• Loan repayments
• Tax payments
• Purchase of stock
• Net Cash Flow: The difference between cash inflows and cash outflows. A positive net cash flow indicates a surplus, while a negative net cash flow indicates a deficit.
• Closing Cash Balance: The amount of cash the business has at the end of the period. This is calculated by adding the opening cash balance to the net cash flow.

Example Cash Flow Forecast

Here's a simple example of a cash flow forecast for a month:

Date	Cash Inflows (£)	Cash Outflows (£)	Net Cash Flow (£)	Closing Cash Balance (£)
1st	500	200	300	800
8th	1200	300	900	1700
15th		500	-500	1200
22nd		200	-200	1000
29th	1000		1000	2000

Opening Cash Balance: £0

Amending or Completing a Cash Flow Forecast

To amend or complete a cash flow forecast, you need to:

1. Identify all expected cash inflows and outflows for the period. This requires researching sales forecasts, supplier invoices, and other relevant information.
2. Estimate the timing of cash flows. When will the money come in and when will it go out?
3. Calculate the net cash flow for each period (e.g., each week or month).
4. Calculate the closing cash balance by adding the opening balance to the net cash flow.
5. Review the forecast regularly and make adjustments as needed. Things can change!

Example Scenario:

A small online shop expects to make £1500 in sales in the next month. It also has to pay for website hosting (£50), packaging (£100), and advertising (£200). The shop starts the month with £200 in the bank.

To complete the forecast:

1. Cash Inflows: £1500
2. Cash Outflows: £50 + £100 + £200 = £350
3. Net Cash Flow: £1500 - £350 = £1150
4. Closing Cash Balance: £200 + £1150 = £1350

Important Considerations

Cash flow forecasts are not perfect. They are based on estimates, and unforeseen events can occur. It's important to:

• Be realistic in your estimates.
• Include contingency funds for unexpected expenses.
• Regularly monitor your actual cash flow against your forecast.
• Be prepared to adjust your business plan if necessary.