Completing Cash Flow Forecasts

Cash inflows include cash received from sales and loans received. Cash outflows include payments for materials, wages, equipment, overheads and loan repayments. Overheads are running costs such as rent and utility bills.

Record a receipt or payment in the period when the cash is expected to enter or leave the business. A loan received adds cash even though it is not sales revenue; repaying a loan takes cash out.

The following forecast uses the figures and row order in OCR’s finance calculations guide. All amounts are in pounds (£). A dash means there is no forecast receipt or payment for that item in that month.

The layout and list of items can vary. The same calculation method applies if a forecast contains other receipts or payments, negative balances, or different time periods.

First, total the inflows and outflows

Add all the cash inflow items within the month. In August, revenue of £12,000 and a loan received of £3,500 give total inflow of £15,500.

Separately, add every cash outflow item within that month. August’s materials, wages, equipment and overheads total:

$4{,}240 + 3{,}250 + 3{,}000 + 5{,}500 = 15{,}990$

Total outflow is therefore £15,990. The equipment payment belongs in August only; September’s £250 loan repayment belongs in September only.

Next, calculate the change in cash

Use the difference between the two totals:

$$\text{Net cash flow} = \text{Total inflow} - \text{Total outflow}$$

For July, $13{,}055 - 12{,}800 = 255$. The positive net cash flow means that £255 more enters the business than leaves it, so the cash balance increases by £255.

For August, $15{,}500 - 15{,}990 = -490$. The negative net cash flow means that payments exceed receipts by £490, so the cash balance decreases by £490.

Net cash flow measures the change during the month, not the cash remaining at the end.

Finally, calculate and carry forward the balance

The opening balance is the cash available at the beginning of the period. The first opening balance must be given or established from earlier information. Here, July begins with £1,760.

Add net cash flow to the opening balance:

$$\text{Closing balance} = \text{Opening balance} + \text{Net cash flow}$$

July’s closing balance is $1{,}760 + 255 = 2{,}015$, or £2,015. This becomes August’s opening balance: the cash left at the end of July is the cash available at the start of August.

August’s closing balance is $2{,}015 + (-490) = 1{,}525$, or £1,525. Carry this forward as September’s opening balance. September’s closing balance is then $1{,}525 + (-905) = 620$, or .

Both August and September have negative net cash flow, but their closing balances remain positive because the business starts each month with enough cash to cover the decrease. A negative closing balance, by contrast, indicates a forecast cash shortfall at the end of the period.

Finding missing figures and checking your work

A partly completed forecast may give a total but leave one receipt or payment blank. Subtract the known items from the total. If August’s loan received were missing, total inflow of £15,500 minus revenue of £12,000 would reveal the £3,500 loan.

You can also work backwards from the balances:

$$\text{Net cash flow} = \text{Closing balance} - \text{Opening balance}$$

For August, $1{,}525 - 2{,}015 = -490$, confirming the net cash flow calculated from receipts and payments.

Check that every closing balance equals opening balance plus net cash flow, and that each following opening balance matches the previous closing balance. These two checks connect the forecast into one continuous record of expected cash.