IB Business Management SLTopic 3 — Cash FlowPaper 1 & 2Core skill~12 min read
Building a Cash Flow Forecast
A cash flow forecast is a month-by-month prediction of money in and money out. Four terms run the whole thing, and once you can move down a column without hesitating you can handle any Paper 2 table they give you.
📚 What you need to know
A forecast predicts cash inflows and outflows, usually over six to twelve months.
Net cash flow = total inflows − total outflows for the month.
Opening balance is last month’s closing balance carried forward.
Closing balance = opening balance + net cash flow.
One change ripples through four rows: total outflows, net cash flow, opening balance and closing balance.
Forecasts support a loan application and form part of a business plan.
They are only estimates — external events can wreck them, and new entrepreneurs find them hardest to get right.
The four terms and how they connect
Every month follows the same three moves: add up what comes in, subtract what goes out, then carry the result forward. The carry-forward is the part students forget under pressure.
Notice that March’s closing balance is the same as January’s even though the months look very different. Only the ending matters for the next month.
The two lines that do all the work
net cash flow = inflows − outflows • closing balance = opening balance + net cash flow
A three-month forecast
Here is a small shop’s forecast. Read down each column: inflows, outflows, net cash flow, then the two balances.
$
January
February
March
Opening balance
3,000
2,300
4,000
Cash from sales
18,000
21,000
16,000
Total inflows
18,000
21,000
16,000
Stock purchases
7,000
7,500
6,000
Wages
8,000
8,000
8,000
Rent
2,500
2,500
2,500
Other costs
1,200
1,300
1,200
Total outflows
18,700
19,300
17,700
Net cash flow
(700)
1,700
(1,700)
Closing balance
2,300
4,000
2,300
Read the pattern, not just the numbers. Wages and rent are the same every month whatever sales do — those are the fixed costs from 3.3 showing up as cash. Sales swing, costs do not, and that is where the risk lives.
Seeing the danger before it arrives
The whole point of forecasting is to spot the month when the balance goes negative, while there is still time to arrange an overdraft rather than beg for one.
Nothing here is unexpected to a business that forecasts. Everything here is a crisis to one that does not.
Uses of a forecast
Limitations
Supports a loan application and forms part of the business plan
Built on estimates; real inflows and outflows can differ a lot
Shows shortfalls and surpluses in advance so plans can be made
Takes skill, research and time to prepare and keep updated
Helps avoid costly mistakes and panic borrowing
External shocks — a recession, a supplier price rise — are not in it
Worked examples
WORKED EXAMPLE 1
Completing a month [4 marks]
In February the shop above expects inflows of $21,000 and outflows of $19,300, opening the month with $2,300. Calculate February’s net cash flow and closing balance, and March’s opening balance.
Step 1: net cash flow$21,000 − $19,300 = $1,700Step 2: closing balance$2,300 + $1,700 = $4,000Step 3: carry it forward
March’s opening balance is February’s closing balance.
Net $1,700 | Closing $4,000 | March opens at $4,000never recalculate an opening balance — it is always just copied across from the month before
WORKED EXAMPLE 2
One change, four rows [6 marks]
The owner hires an extra assistant, raising wages from $8,000 to $9,200 a month from January. Recalculate the three closing balances and comment.
Step 1: new total outflows (each month rises by $1,200)Jan: 18,700 + 1,200 = $19,900Feb: 19,300 + 1,200 = $20,500Mar: 17,700 + 1,200 = $18,900Step 2: new net cash flowsJan: 18,000 − 19,900 = (1,900)Feb: 21,000 − 20,500 = 500Mar: 16,000 − 18,900 = (2,900)Step 3: work down the balances in orderJan: 3,000 − 1,900 = $1,100Feb: 1,100 + 500 = $1,600Mar: 1,600 − 2,900 = ($1,300)March now ends $1,300 overdrawnone $1,200 decision turned a $2,300 cushion into a $1,300 hole — that is the point of the question, so say it
💡 Exam tip
Work month by month, left to right. Never jump to the last column.
Put negatives in brackets, the way accounts do.
After a change, redo all four affected rows. Marks are awarded for the chain, not one figure.
Check your arithmetic twice — one slip poisons every month that follows.
When asked to comment, name the month the balance turns negative and suggest a specific action.
Say something about reliability: whose estimates are these, and how experienced are they?
⚠ Common mix-up
Closing balance confused with net cash flow. Net cash flow is the month; the balance is the running total.
Recalculating opening balances. They are copied, not computed.
Putting credit sales in the month of the sale. Cash forecasts use the month the money actually arrives.
Treating the forecast as fact. It is a set of estimates and should be discussed as such.
Including depreciation. No cash moves, so it does not belong in a cash flow forecast.
Ignoring the loan itself. Borrowed money is an inflow; the repayments are outflows in later months.
Up next: Fixing a Cash Flow Problem — what to actually do about that negative month.
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