F2 Creation of Cash Flow Forecasts
Cash flow is the money entering and leaving the business over a period of time. A cash flow forecast is a prediction of future inflows and outflows over a period of time whereas a cash flow statement is a record of inflows and outflows that have already occurred.
A cash flow forecast is a prediction of the inflows and outflows of a business across a period of time in the future. A 12 month cash flow forecast will usually itemise the predicted inflows and outflow each month. This allows a business to anticipate periods of negative cash flow and take preventative action.
Cash inflows may include money received from cash sales and credit sales, loans, money invested by owners, grants and sale of fixed assets.
Cash outflows are the amounts of money leaving the business in different time periods. They may include premises costs, staff costs, costs of equipment and raw materials, loan and interest payments and vehicle costs.
Net cash flow is the inflow per time period minus the outflow for the same time period.
The closing balance is the net cash flow plus the opening balance. The opening balance for one time period is the same as the closing balance for the previous time period.
Constructing a Cash Flow Forecast
Opening balance = closing balance of previous month. For a new business, opening balance may be zero unless otherwise stated.
Net cash flow = opening balance + closing balance
Closing balance = net cash flow + opening balance
