IB Business Management HLTopic 3 — Finance and AccountsPaper 1 & 2Core skill~10 min read
Building a Cash Flow Forecast
A cash flow forecast is a month-by-month prediction of money coming in and money going out. It is the single most useful table a small business owner ever fills in, because it shows a shortage weeks before it arrives — while there is still time to do something about it.
What you need to know
A cash flow forecast predicts inflows and outflows, usually over six to twelve months.
Net cash flow = total inflows − total outflows for that month.
Opening balance = last month’s closing balance, carried forward.
Closing balance = opening balance + net cash flow.
Negative numbers are usually shown in brackets, like (1,200).
One change ripples through four rows: total outflows, net cash flow, opening balance and closing balance.
The three sums, in order
Every cash flow question in the world is these three lines repeated across the columns. Learn the order and the rest is arithmetic.
Net cash flow
total inflows − total outflows
Closing balance
opening balance + net cash flow
Next month’s opening balance
this month’s closing balance
Work down one column completely before moving to the next. Working across a row is how students lose four marks from one mistake.
A worked forecast
Here is the first four months for Rani’s Bakery, a new shop. The owner puts in $3,000 to start and the bank approves a $10,000 loan in January, repaid at $500 a month from February.
Item ($)
Jan
Feb
Mar
Apr
Opening balance
3,000
8,000
3,900
2,700
Cash from sales
12,000
14,000
18,000
21,000
Bank loan received
10,000
0
0
0
Total inflows
22,000
14,000
18,000
21,000
Ingredients and stock
6,000
6,500
7,500
8,000
Wages
7,000
7,000
7,000
7,000
Rent
2,500
2,500
2,500
2,500
Other running costs
1,500
1,600
1,700
1,800
Loan repayment
0
500
500
500
Total outflows
17,000
18,100
19,200
19,800
Net cash flow
5,000
(4,100)
(1,200)
1,200
Closing balance
8,000
3,900
2,700
3,900
Month by month
January. Sales of $12,000 plus the $10,000 loan give inflows of $22,000. Outflows are $17,000, so net cash flow is +$5,000. Added to the $3,000 opening balance, the closing balance is $8,000.
February. The loan money has gone, so inflows drop to $14,000 while outflows rise to $18,100. Net cash flow is −$4,100 and the balance falls to $3,900.
March. Sales are growing but still below costs. Net cash flow is −$1,200 and the balance reaches its low point of $2,700.
April. Sales of $21,000 finally beat outflows of $19,800. Net cash flow turns positive at +$1,200 and the balance recovers to $3,900.
The shape matters more than any single number. A balance heading downhill needs action even while it is still positive.
WORKED EXAMPLE
One change, four rows affected
Rani hires an extra baker, so wages rise to $8,000 a month from March onwards. Recalculate the closing balances for March and April. [4]
Step 1: new total outflows for March7,500 + 8,000 + 2,500 + 1,700 + 500 = $20,200Step 2: new net cash flow for March18,000 − 20,200 = −$2,200Step 3: March closing balance, carried into April3,900 − 2,200 = $1,700Step 4: April outflows, net cash flow and closing balance8,000 + 8,000 + 2,500 + 1,800 + 500 = $20,80021,000 − 20,800 = +$2001,700 + 200 = $1,900March $1,700 and April $1,900One extra wage line pushed the April balance down from $3,900 to $1,900. February is untouched because the change starts in March.
What the forecast is for
Uses
Limitations
Supports a loan or overdraft application — banks expect to see one
Every figure is an estimate, and reality rarely matches the plan
Shows shortfalls and surpluses in advance, so plans can be made
It takes skill, research and time to build a forecast worth trusting
Forms part of the business plan and helps set spending limits
External shocks such as a supplier price rise are not in the numbers
Lets the owner test “what if” scenarios before committing money
New entrepreneurs have no past data to base predictions on
A forecast is only as good as its assumptions. Look in the case study for where the sales figures came from. Market research is very different from an owner’s optimism.
Filling in a blank forecast under exam pressure
Write in the numbers you are given and mark the ones you must calculate.
Total the inflows for the first month, then the outflows.
Subtract to get net cash flow. Bracket it if it is negative.
Add it to the opening balance for the closing balance.
Carry that figure across to become next month’s opening balance, then repeat.
Check the last column against the trend. A wild jump usually means an arithmetic slip.
Exam tip
Never put the opening balance in with the inflows. It is a starting position, not money received this month.
Show working for at least one full column — method marks are given even if a number is wrong.
Use brackets or a minus sign consistently for negatives.
If asked to comment, describe the trend and name the worst month.
Recommend action that matches the size of the gap. A $1,200 dip needs an overdraft, not a share issue.
Loans appear twice: the money received is an inflow, the repayments are outflows.
Common mix-up
Adding the opening balance to inflows. It only joins in at the closing balance stage.
Forgetting to carry the closing balance forward. Every month after that will then be wrong.
Putting depreciation in the forecast. No cash moves, so it does not belong.
Recording a credit sale in the month it was made. Cash flow uses the month the money actually arrives.
Calling a negative net cash flow a loss. It is a cash shortfall for that month, not a loss for the year.
Assuming a negative month is a disaster. A start-up almost always has them; what matters is whether the balance recovers.
Up next: Fixing a Cash Flow Problem — what a business actually does once the forecast shows trouble.
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