Constructing a cash-flow forecast

The layout

Every forecast has three blocks:

1. Cash inflows: cash sales, payments received from credit customers, loans, capital introduced, sale of assets.

2. Cash outflows: materials, wages, rent, utilities, loan repayments and interest, purchase of equipment, tax.

3. Balances:

• Net cash flow = total inflows - total outflows.
• Opening balance = last month's closing balance.
• Closing balance = opening balance + net cash flow.

Negative figures are shown in brackets.

A cash-flow forecast for a new cafe; brackets show negative figures

Timing matters

Cash flow records money when it actually moves, not when a sale is agreed. If customers are given one month's credit, January's credit sales appear as an inflow in February. If the business gets 30 days' credit from suppliers, January's purchases are paid in February.

A common exam mistake is to put credit sales in the month of sale, or to forget to carry the closing balance forward as the next opening balance.

Filling gaps in a forecast

Exam questions often give a forecast with blanks. Work row by row:

• Missing total: add the items.
• Missing item: total minus the other items.
• Missing net cash flow: inflows minus outflows.
• Missing opening balance: previous closing balance, or closing balance minus net cash flow.

Always check the final closing balance is consistent.

Worked example

Use the cafe forecast in step 1. Show how the March closing balance is found.

1. March inflows = 12,000; outflows = 14,500
2. Net cash flow = 12,000 - 14,500 = (2,500)
3. Opening balance = February closing balance = (5,000)
4. Closing = (5,000) + (2,500) = (7,500)

Answer: March closing balance: $(7,500) (negative: an overdraft is needed)

Check yourself

1. In June a firm expects inflows of $34,500 and outflows of $41,200. Calculate net cash flow.
   Show answer

   $-6700. 34,500 - 41,200 = -$6,700 (a net outflow).

2. Opening balance is $3,200 and net cash flow is -$6,700. Calculate the closing balance.
   Show answer

   $-3500. 3,200 + (-6,700) = -$3,500: the business needs an overdraft.

3. A month's closing balance is $11,400 and its net cash flow is $2,900. What was the opening balance?
   Show answer

   $8500. Opening = closing - net = 11,400 - 2,900 = $8,500.

4. A business sells $20,000 of goods in March: 40% for cash and the rest on one month's credit. How much cash from these sales is received in April?
   Show answer

   $12000. 60% on credit, received in April: 0.6 x 20,000 = $12,000.

5. Total outflows in May are $18,750. Materials are $7,300, rent $2,500 and the only other outflow is wages. Find wages.
   Show answer

   $8950. 18,750 - 7,300 - 2,500 = $8,950.

6. In the cafe forecast in step 1, what is the lowest closing balance in the four months?
   Show answer

   $-7500. Read the closing balance row and pick the most negative or smallest figure.

7. Which is a cash inflow?
   • A bank loan received
   • Rent paid
   • Purchase of a delivery van
   • Interest paid on an overdraft
   Show answer

   A bank loan received. Money coming in, even though it must be repaid later.

8. The opening balance for April is
   • the net cash flow for March
   • the closing balance for March
   • total inflows for April
   • always zero
   Show answer

   the closing balance for March. Balances carry forward month to month.

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Sources

• Pearson Edexcel International Advanced Subsidiary/Advanced Level in Business specification (2018)

Last updated 8 November 2026. Spotted a mistake? Tell us.